Whirlpool suddenly a market darling

The appliance maker was a disaster last year, but suddenly investors are seeing a lot to like.

By Kim Peterson Feb 10, 2012 3:22PM
Image: A woman looking at a washing machine in an electrical shop © altrendo images/Stockbyte/Getty ImagesWhirlpool (WHR) is one of the top three performers in the market this year. Seriously? Whirlpool?

This was a stinker of a stock in 2011, plunging nearly 50% as investors wanted nothing to do with appliances or the housing market. But it's a whole new story in 2012 as shares have soared 44% to $70 in weeks.

Why is everyone fired up about Whirlpool? And could this rally possibly last?

Short answer: Whirlpool fell much harder than it needed to last year on concerns about the economy stalling and about the health of one of its biggest customers, Sears Holdings (SHLD). Now that some of those concerns are gone, it's winning back investors' confidence. But this stock will not continue its momentum.

About 10% of Whirlpool shares are being shorted. One investor who previously liked Whirlpool but is now shorting the stock explains his reasoning in the following video.

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Whirlpool really piqued investors' interest on Feb. 1, when it forecast 2012 earnings of $6.50 to $7 a share. That was extraordinarily high, since most analysts were looking for $5.85 a share.

As it gave those fantastic projections, it reported a fourth quarter that missed slightly on revenue but beat on profit. Revenue of $4.9 billion missed expectations of $4.99 billion. Sales were down 2.6% from a year earlier. Profit was $2.62 a share, surprising analysts that had expected $1.96.

The numbers bewildered analysts. Could this company really pull in full-year earnings of as much as $7 a share? That's 40% more than the $4.99 a share it saw for 2011.

Like the investor in the above video points out, this company is raising the bar too high. It's too optimistic.

The global economy is not poised to support that level of earnings growth at Whirlpool. The company has been moving to cut costs, and perhaps it can continue that to produce 40% earnings growth, but that's iffy.

Whirlpool makes great products, including the Maytag and KitchenAid lines. Its products are often pricey but with a quality level to match. And it's been raising prices over the last year to absorb higher costs.

But here's the problem: The company is seeing a lot of pricing competition from South Korean manufacturers, including Samsung and LG Electronics. In fact, Whirlpool has asked the U.S. government to investigate why those companies are selling washers at below market value.

Whirlpool has been reducing costs by outsourcing factory jobs from America to other countries. It's also saving money by using common parts across several appliance families, Reuters reports.

The company thinks its U.S. shipments this year could grow as much as 3%. It's also forecast growth of as much as 5% in Latin America and 4% in Asia. But with the euro crisis far from resolved, the company said shipments to Europe, the Middle East and Africa could fall as much as 5%.

The real factor here is what will happen to the U.S. economy and Whirlpool's U.S. share in the face of tough competition from Asian manufacturers.

And at least one analyst is taking issue with Whirlpool's forecast of $100 million to $150 million in free-cash flow this year. Whirlpool has nearly $400 million in legal obligations, $250 million in pension contributions and other cash requirements this year, writes Jeff Sprague of Vertical Research Partners (via Barron's).

Historically, the company's free-cash flow has averaged about 2.2% of sales. The forecast this year puts that flow at about 5.5% of sales, Sprague calculates. He has a sell rating on the stock.

Whirlpool's trailing price-to-earnings ratio is 14, up from about 11 a year ago. That's not cheap.

This is a stock that deserves its comeback from the unfair beating it took last year. But should it go up from here? Don't count on it.

Tags: SHLDWHR
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