Whirlpool: Classic Value
When a successful company buys a lesser and troubled rival, you have to think about the makers of Mercedes-Benz and why on earth they tortured themselves with Chrysler. Similarly, Whirlpool took a huge chance by buying Maytag a year ago for $2.8 billion in cash, stock and assumed debt. Besides paying dearly for a famous but lagging brand, a company Whirlpool candidly described afterwards as hindered by high production costs and lack of innovation, the buyout coincided with a downturn in homebuilding and remodeling. Housing was still rollicking when Whirlpool cooked up the transaction in the middle of 2005.
Whirlpool justified the acquisition by assuming $400 million in savings, or a good year’s total profit, from the combined companies. After closing some Maytag plants, Whirlpool expects to reach these savings by the end of 2007. Moreover, Whirlpool says the acquisition allows it to expand its presence in stores and fill a few holes in product lines, despite already being the dominant brand in the U.S and owning major brands in Europe and Latin America.
Whirlpool has defended the merger aggressively, a strategy that’s won it time from Wall Street to put up or shut up. So far, it appears the combination is working. In mid February, Whirlpool reported that it earned $6.35 per share in 2006, ahead of the $6 to $6.25 the company had predicted at merger time and the $5.50 to $6 that analysts had been forecasting. The good showing came largely from increased sales overseas, although some deferred capital spending contributed to the positive surprise. And the company produced enough cash flow to work off some of the acquisition debt. The stock (symbol WHR), which fell from $91 to the $70s soon after the completion of the merger, has recovered all of its losses. It closed at $94.44 on February 21, down 1.5% for the day.
At the same time they announced 2006 results, Whirlpool’s brass forecast earnings of $9 a share this year. Given that Whirlpool hasn’t experience year-to-year earnings gains of that magnitude since 2002 and 2003, the forecast seems awfully aggressive. Such bears as Citigroup analyst Jeffrey Sprague don’t see $9 as a remote possibility. He cites higher costs for such materials as steel and copper in contending that it’s just as plausible that Whirlpool earnings will fall than rise by some 40%. Sprague recommends selling the stock.
Whirlpool’s retort to Sprague and other doubters is that higher prices, new products (there are cool new high-end washers and dryers ready to ship) and more economizing will leverage the profits. If the company is right, and Whirlpool maintains its price-earnings ratio of about 14, there is enormous upside in the stock, to as much as $125 in the coming year.
The deciding factor appears to be what happens to housing starts. If they plunge more, Whirlpool is in trouble. If they don’t, and mortgage rates stay low enough so that enough people move and remodel, appliance sales will exceed expectations. One thing the Maytag acquisition did -- and why this situation isn’t entirely like DaimlerChrysler -- is result in a near-monopoly. Chinese appliance makers are competitors on the low end, but after them and GE, this business is a one-horse race. Whirlpool’s stock may be weak in the first half of the year. If it retreats, as it did in 2006, it could be a classic value opportunity.