Whirlpool Corporation (NYSE:WHR) is a leading provider of home appliances to consumers all over the world. In 2021, the company reported record results and increased their dividend for the ninth consecutive year. Moreover, the 25% increase in the dividend was paired with the announcement of further buybacks. Additionally, earlier in March 2022, the ratings outlook was revised to positive by Fitch to reflect the company’s conservative capital allocation strategy.
Despite the positive outlook, shares in WHR have significantly underperformed and are currently trading near their lows. The liquidity profile, cash flow strength, and earnings potential of the company present investors with an attractive entry point to a company that will benefit from continued replacement demand and eventual increases of new home supply that will need to be furnished with new appliances. For new investors, shares in WHR present an opportunity for continued dividend growth and share price appreciation of nearly 20%.
WHR is a global appliance company that manufactures and markets their products all over the world. Their notable brands include Whirlpool, KitchenAid, and Maytag, among others. Their business is conducted through four operating segments: North America; Europe, Middle East, and Africa (EMEA); Latin America; and Asia.
In 2021, WHR reported +$22B in net sales. The disaggregation of revenues by segment, available within the annual 10-K filing, is below. Historically, just over 55% of total net sales are generated in North America. The next largest segment is EMEA, which accounts for about 25%. Revenues in all segments have historically been affected by a variety of seasonal factors. Each year, the company’s revenues and margins are typically highest in the third and fourth quarter. These seasonal patterns are expected to continue in 2022.
Over their long history, WHR has been responsible for numerous first-to-market innovations. This core competency has allowed the company to capture leading market share positions in many of the countries served by the company.
At present, WHR manufactures and markets a full line of home appliances and related products. Their primary offerings include laundry appliances, refrigerators and freezers, cooking appliances, and dishwashers. Additionally, the company’s KitchenAid stand mixer is a leading small domestic appliance unit. Below is a disaggregation of revenues based on product categories. As seen, sales are evenly split between laundry, refrigeration, and cooking.
Regarding raw materials, the company is not dependent on any one source for raw materials or purchased components. Despite this, the overall industry has been impacted by supply constraints, inflationary pressures, and other macroeconomic uncertainties. These challenges are expected to continue in 2022.
Each operating segment operates in a highly competitive environment. Well-known competitors such as LG, Panasonic, and Samsung compete directly with WHR on several major home appliance products. Competition in the industry is based on selling price, product features, and consumer taste, among others. For WHR, they are at a disadvantage when competing against a few global names since some of these competitors have low-cost sources of supply, vertically integrated business models and/or highly protected home countries outside the United States.
Many of the direct competitors for WHR are foreign and not listed in major U.S. exchanges. Below are several related companies within the home and appliance industries. While they may have differing product offerings, it is still helpful to understand the company’s performance against the broader industry. Each competitor in the industry has a market cap of less than +$15B. WHR, though, does have a slight advantage on size and scale. They have nearly 70K employees and a market cap that is almost twice as high as three out of five peers.
While performance has been strong over a longer timeframe, all peers have significantly underperformed over the past year. WHR is down 12% for the year, while the S&P is up 14%. Similarly, the company is down nearly 8% in the month alone, while the S&P is up about 4%.
On valuation, WHR appears to trade at a discount to their peers on several measures. For example, the company trades at a forward pricing multiple of between 7 and 8x, while most of their competitors are above 10x. Additional support for value is implied in the company’s low EV/EBITDA multiple of 5x. Historically, the company has traded at a forward multiple of 10x and an EV/EBITDA of 9x. Compared to their peers and their own historical average, the company appears undervalued.
Though the company has underperformed against the broader market, WHR’s performance has been generally on-par with the industry. Additionally, the company has a size, scale, and brand recognition and loyalty advantage when compared against their direct foreign-based competitors and other publicly traded appliance brands. Furthermore, the current valuation indicates the company is undervalued.
Earnings and Outlook
WHR reported record year-end results in 2021. This was the fourth consecutive year that the company delivered record results. For the year, all measures of performance were up by double digits. GAAP EPS was up 67%, ongoing EBIT was up 35%, and net sales were up 13%.
Throughout the year, the company experienced supply constraints and significant inflationary pressures. But early actions taken to preserve margins provided significant benefits that offset +$1B in raw material inflation. This resulted in record margins of 10.8% on the double-digit sales growth. Additionally, adjusted free cash flow (FCF) came in at a record +$2B. This allowed the company to return +$1.4B to shareholders in the form of buybacks and dividends. From an individual regional perspective, gains were strong across the board, with revenues in all regions up double-digits from the prior year.
Looking ahead to 2022, the company is expecting the challenging business environment to continue, especially in the first half of the year. Customer demand, however, remains strong, driven by nesting trends and a strong replacement cycle, which accounts for over 50% of sales in the North American region. Overall sales are expected to increase 5-6% with EBIT margins of 10.5%. Additionally, FCF is projected to be about +$1.5B. Lastly, the negative impact of raw material inflation is expected to be between +$1B-+$1.25B.
The primary concerns for the business in 2022 are on the supply side as opposed to customer demand. While it has been speculated that there was a pull-forward effect in appliance-related demand due to COVID, the company’s data says otherwise. In the last two years, there has been accelerated use and consumption of appliances, which drives faster and stronger replacement going forward. For example, in the fourth quarter, usage in appliances were up 150% from pre-COVID levels.
Thus, as more people spend time at home for work or other reasons, usage will continue to increase, which will in turn accelerate replacement rates. While demand is expected to remain strong, the ability to meet this demand is an issue that will continue to challenge the company. Constraints in the supply chain are expected to alleviate but not until the later half of the year. In the near term, this can negatively impact operations. Nevertheless, the company is still forecasting another year of robust sales and earnings.
At the end of December 31, 2021, WHR reported total current assets of +$9.7B and total current liabilities of +$8.5B. This represents a current ratio of 1.14x. Current assets included cash on hand of +$3B, which represented 30% of the total. Inventories and A/R, on the other hand, accounted for 60% of the total.
The seven liquidity ratios below provide further insight into the short-term financial performance of the company. Both the current ratio and the quick ratio have improved from levels prior to 2019. This was due to improvements in the company’s cash position, as evidenced by the increase in the number of days of cash on hand. Prior to 2019, WHR was holding about 20 days of sales in cash. That has since gone up to 50 days.
A ratio of 1x or greater is preferable for the current and quick ratio. While the current ratio is adequate, the quick ratio could benefit from increased levels of cash and/or increased sales. The A/R arising out of increased sales, however, should be collected upon on a timely basis. An increase in A/R would increase the quick ratio. But if the company is unable to collect on the A/R in a timely manner, then that would be a net negative.
In the past two years, collection times have increased from 40 days in 2019 to 52 days in 2021. This could be an indication of deterioration in the health of the consumer, or it could be related to other benign factors. The allowance on receivables, which measures collectability, was insignificant, as seen below, so the increase in the number of days to collection is unlikely to be related to financial deterioration.
Also of note is that net sales to Lowe’s (LOW) is approximately 13% of total net sales. Additionally, the retailer accounted for 21% of total A/R at the end of 2021. There are no indications of economic distress with Lowe’s, so it is very likely the delay in collections is related to benign factors. Still, it is a metric worth monitoring moving forward.
While the days to collect on A/R have gone up, the company is still selling their inventory in the same amount of time as in prior years. This is despite the supply disruptions of the past two years. The consistency could also be related to the contracts the company has with their customers. In GAAP accounting, reductions in inventory are reported either when the goods are loaded onto the carrier or when the customer receives the goods, depending on the contract.
WHR discloses within the notes to their financial statements that they use both types of contracts. However, if more of their contracts are structured to report sales when goods are loaded onto the carrier, then the impacts of supply disruption are more muted on the balance sheet. In the past two years, it has been the receipt of goods that has been the primary issue, not necessarily the shipping of them.
The summary below provides a summary of the number of days of other financing required by the company after accounting for the number of days it takes to sell inventory, collect on the sale, and pay suppliers. In 2021, for example, it took 52 days for WHR to sell their inventory. It then took another 52 days to collect on that sale. Thus, there were 104 total days of pending cash conversion. In that timeframe, the company held off payment to their suppliers for exactly 104 days.
In other words, the company received 104 days of noninterest-bearing, supplier-provided financing. Therefore, there were no additional days where the company required financing from other sources, such as cash or other longer-term arrangements. This indicates prudent working capital management on the part of the company. Since the time to collect on A/R has increased, the company has in turn delayed their payments to suppliers. The delays have yet to be an issue on any party involved in the chain of business.
Overall, the company is in a strong liquidity position. They have a sizeable cash balance, and there are no apparent concerns regarding their working capital management. The time to collect on A/R has increased, and that should be monitored moving forward. But the existing allowances don’t indicate consumer deterioration. So, this is not an immediate concern. As such, it is appropriate to apply an above average rating to short-term liquidity.
Long-Term Solvency Analysis
WHR reported +$15.3B in total liabilities at the end of 2021. This represented a total debt to assets ratio of 75%, which is in-line with prior periods. Upon further analysis of the other solvency ratios below, one can see that the company has reduced leverage over the years. In 2018 and 2019, for example, total debt was over 3.5x equity. That ratio has since dropped to about 3x. Furthermore, the company’s ability to cover their interest obligations has substantially increased into the double digits. In 2017, their coverage was 6.6x versus 14x in 2021. Part of this is related to the lower interest rate environment, but it is also due to significant earnings growth.
One non-GAAP measure the company uses to track leverage is their gross debt leverage ratio. It is a function of gross debt outstanding, which consists of total long-term debt and their current maturities, in addition to notes payable and ongoing EBITDA. The company’s target on this metric is 2x. As seen below, WHR is meeting this goal. This measure is also important because it is referenced by the credit rating agencies when assessing the ratings outlook. In early March, Fitch upgraded the company’s outlook to positive from stable, in part because of the company’s conservative capital allocation strategy.
Below is a summary of the upcoming debt maturities on WHR’s long-term debt. Over 60% of the total is due after 2026, and the portion due prior to then are spread out evenly each year. Thus, there are no concerns regarding repayment risk.
WHR’s long-term solvency outlook is positive. The company recently received a ratings upgrade, and the analysis above affirms the conclusion of the ratings agency. WHR’s interest obligations are well covered, and they don’t have any near-term debt maturities. In addition, the company is meeting their internal debt targets and expects to continue doing so moving forward. Therefore, a strong rating on long-term solvency is appropriate.
WHR had a record year in 2021 that was accompanied by record margins in every measurable category. As seen below, gross profit and EBITDA margins were both in the double-digits. The company also reported significant improvement in both net income and FCF margins. This comes on top of a 13% increase in sales for the year.
For long-term value creation, WHR focuses on four metrics: sales growth, ongoing EBIT, FCF, and ROIC. The targets of each are shown below. As shown earlier, the company is meeting these targets.
A summary of ROIC performance is shown below. While there was a dip from 2018 to 2019, performance has improved significantly from the 9.6% reported in 2018 to the 15% reported in 2021. ROIC is important because it represents an important measure of capital efficiency, which is a key driver of sustainable shareholder value creation.
When compared against related peers, WHR also appears to be performing in-line or better on various metrics. The company is lagging Helen of Troy on margins, but WHR has an advantage when considering return on equity, assets, and capital. Additionally, the company is one of the only names, besides Mohawk Industries, to be generating over +$1B in operating cash flow. This is important for overall growth and shareholder returns.
WHR is performing strongly on profitability. They had a record year in 2021, and they expect to have another strong year in 2022. In addition, they are outperforming their own internal metrics and several of their peers on various profitability measures. Therefore, it is safe to assess a strong rating on profitability.
Cash Flow Analysis
WHR generated +$2.2B in cash from operations in 2021. This was 45% greater than in 2020 and 77% higher than 2019. The gains were primarily attributable to earnings growth. The primary working capital adjustments during the year were net changes in inventories and AP. Raw material inflation drove AP higher during the year, but this increase was offset by an increase in inventory. Increases in inventory were due to a combination of higher input costs and purchases.
The summary further below was prepared using the data available within the cash flow statement. In 2021, the company’s cash balance increased from +$2.9B to +$3B. As can be seen, the +$110M increase was essentially all due to strong earnings growth. Additionally, WHR also received +$341M from the divestiture of Whirlpool China. The receipt of these proceeds is netted within the investing line item.
Activity within financing activities were related principally to shareholder returns. In 2021, the company returned +$1.4B to shareholders in the form of buybacks and dividend payouts.
Various measures were calculated to determine the safety of the shareholder payouts. The results of these calculations are included in the summary below. For the last three years, WHR has been generating strong FCFs and returning a modest portion of it back to shareholders. The coverage on all measures is very strong. For example, dividends are less than 20% of net income and are being covered by operating and FCFs by more than 4x. When including share repurchases, the coverage falls but is still adequate. Overall coverage is clearly strong and future payouts appear safe and are likely to grow further on earnings growth.
A strong rating on cash flows is appropriate due to the strong earnings power of the company and their conservative allocation of cash. Furthermore, shareholder payouts are well covered and are likely to grow higher in future periods.
Intrinsic Share Price
Various methodologies were utilized to obtain an indication of the intrinsic share price of WHR. The results are provided in the chart below. The quickest methods involved simply applying the historical multiples to current pricing. Doing so yielded target prices with a low of $198 to a high of $251. The $351 price point indicated by the EV/EBTIDA multiple was an outlier, so that was eliminated from consideration.
When applying models involving future cash flows, results came in at a low of $194 and a high of $253. With these models, the rate on 10-YR U.S. Treasuries is a critical variable in the computations. Since rates are projected to increase, the model incorporated the current rate, which was 2.3% at the time of analysis, as reported in The Wall Street Journal. And for hypothetical purposes, the analysis also utilized a rate of 3%.
When considering the results of all methods, the average target price worked out to be $225.
For illustrative purposes, what follows is an expansion of the results of the FCF valuation method.
The first step in the model was to input the historical data from the past five years. For simplicity, a fixed tax rate of 24% was used for all periods in arriving at NOPAT. This tax rate is consistent with current rates. Furthermore, total operating capital was defined as the combination of total current assets and net PP&E, less total current liabilities. The net new operating capital was simply the year-over-year change. FCF, then, was the difference between NOPAT and net new operating capital.
The next step in the model was to input the various assumptions required to calculate the future cash flows to the company. The growth rate of sales for this model was expected to be in the mid-single digits with long run FCF growth settling in at 3%. The sales figures are generally in-line with management’s outlook. The long-run FCF growth rate, on the other hand, was meant to track long-run GDP growth, which is projected to be in the low-single digits.
Operating costs as a percentage of sales have historically been in the upper 80s, while depreciation and amortization as a percentage of operating capital has been around 12% over the past two years. For this model, higher percentages for operating costs were used for near-term periods before returning to more normal levels in the later years. Depreciation was kept at 13% for all periods.
Finally, the discount rate was obtained by applying the CAPM formula. This formula incorporates the stock beta, the risk-free rate, and an expected risk premium. The beta of WHR is 1.75, as reported in Morningstar. The risk-free rate was 2.30%, as stated earlier. The historical risk premium is 5.5%. Thus, the expected return on market is 7.80%. The result of the CAPM upon inputting these variables is 11.93%
The summary below provides the projected FCFs over the next five years. The results of this model are on the conservative side to account for the risk of deviations and setbacks from management’s outlook.
The final step in the model was to calculate the terminal value using the long-run FCF growth rate and combine that result with the sum of the present value of the future FCFs above. Additionally, the market value of debt needed to be deducted from the totals to arrive at the intrinsic value to common shareholders. In the notes to the financial statements, it was disclosed that the market value of debt was +$5.7B. Therefore, that is what was used in the calculation.
As seen above, the intrinsic share price using this model is $217. Taken together with the other methods, this further supports a target price of $225.
WHR is a major supplier of home appliances to Lowe’s. Net sales to this retailer accounted for 13% of net sales in 2021. Lowe’s also represented 21% of the company’s A/R at the end of 2021. The loss or substantial decline in the volume of sales to this retailer or any substantial deterioration in the economic position of the company would result in a material impact to WHR’s operations.
In 2021, sales outside of the North American region accounted for approximately 43% of total sales. Exposure to international markets subjects the company to the risk of potential economic/political instability in the host country. Additionally, the company may be negatively impacted by geopolitical conflicts that may arise between the U.S or their allies and any of the countries that the company operates in. Tariffs and counter-tariffs, increased regulation, boycotts, and long-winded lawsuits are potential complexities that could raise the cost of doing business for the company.
The company uses a wide range of materials and components in the production of their products. These components come from numerous suppliers all over the world. An inability to procure the necessary components may impact WHR’s manufacturing processes. Furthermore, continued disruptions in the supply chain that arose over the past two years may further impede the company’s ability to meet demand. If WHR is unable to fulfill the orders of their consumers, they are at risk of brand impairment and the loss of future sales.
WHR reported record results in 2021, and the strong performance is expected to continue in 2022. The strong performance and ability to meet their internal targets resulted in a credit upgrade from Fitch earlier this month. Despite the outperformance, shares in the stock are down significantly over the past month and are currently trading near their lows.
The liquidity position is strong and includes +$3B of cash on hand. Management is also prudent in maintaining the optimal level of working capital that minimizes the amount of funds tied up in operational activities. The strong balance sheet provides the flexibility needed to invest in growth and to return excess cash to shareholders.
With earnings expected to continue growing, shareholders should be rewarded with further dividend payouts and share price appreciation. At current pricing, the stock is nearly 20% undervalued. As such, an attractive opportunity exists for new investors who seek growth at reasonable risk levels.