Whirlpool Is Your Best Bet in Consumer Appliances
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Whirlpool (NYSE: WHR) has been a great performer in the past year with a gain of over 114%. I think there is still potential for more gains as the company continues to make the right moves in the consumer appliance sector. Two of its chief competitors are consumer appliance companies inside of giant organizations. Whirlpool is able to adapt much quicker to changing market conditions and make inroads into new and emerging markets. As housing continues to recover, demand for home appliances should also increase.
Can't run a home without Whirlpool
Chances are, you have a Whirlpool appliance in your home. The company manufactures laundry machines, refrigerators and freezers, cooking ranges, dishwashers, and even portable appliances such as mixers. Its brand names include Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana and many others, and are sold around the world.
Even with the run-up in price, Whirlpool still looks attractive. The company trades at a forward price-to-earnings ratio of only 11 and a price/earnings-to-growth ratio of 0.47. Whirlpool has operating cash flow of $814 million a year to service $2.45 billion in debt. It pays an annual dividend of $2.50 per share for a yield of 1.90%. The dividend payout ratio is only 28%, so there's plenty of room to increase the dividend going forward.
In the first quarter of this year, earnings per share came in at $1.97 as compared to $1.41 last year; this was a gain of 40%. Even though sales are rising only in the single digits, the company's focus has been on margin expansion and increasing profits. Operating margins were 9.7% in the first quarter, an expansion of three points year-over-year.
Outlook for growth
Whirlpool's outlook for its North American business depends on the housing recovery. Management sees housing continuing to strengthen and is forecasting growth of 2% to 3%. What I like about the North American business is that this is the market where the company is able to cut costs the most and increase margins.
For top line growth, the company sees that coming from Latin America and Asia. Growth in those regions is forecast to be 3% to 5% this year. Growth is likely to be flat in Europe, but considering the situation there it's a positive that the company isn't losing market share.
Where Whirlpool sees the biggest potential for growth is in the Asia-Pacific region, particularly in China. Whirlpool has been in discussions with Panasonic to buy its 30% stake in Sanyo Electric, a Chinese manufacturer of refrigerators and washing machines. If this deal goes through, it would double Whirlpool's market share in China. Currently, only 5% of Whirlpool's revenues come from Asia though this is still up from 3% in 2008. By buying a Chinese manufacturer, it will give Whirlpool a better chance to take on Chinese market leaders Haier, Midea and Little Swan in the fast-growing Chinese market.
Two of Whirlpool's biggest competitors are General Electric (NYSE: GE) and Sears (NASDAQ: SHLD). Both are strong in the home appliance business. General Electric has its signature "GE" brand of appliances, while Sears has its "Kenmore" brands. The problem for both competitors is that they have too much going on in their businesses outside of appliances. For Whirlpool, this is a competitive advantage.
Besides appliances, General Electric has a business in almost any industrial field you can think of as well as a huge finance division. The company did over $145 billion in revenues last year whereas Whirlpool did just a little over $18 billion. If you want to invest in consumer appliances, Whirlpool is the place to be and not General Electric.
Even thou I think Whirlpool has a better appliance business, doesn't mean there isn't potential at General Electric. General Electric looks to be in the top three in any of its businesses. Looking forward, General Electric has a great collection of businesses in its portfolio with plenty of room for growth. For example, General Electric has a rapidly-growing healthcare business and has invested $2 billion to accelerate its software development. This will increase productivity and drive margins and profits for its healthcare division.
Another segment with tremendous growth prospects for General Electric is its aircraft engine business. The company delivered 3,300 engines last year, and the figure for this year is forecast to be between 3,600 to 3,800 engines. These are big-ticket items and that's tremendous growth. In the U.S. alone, most airlines need to buy new airplanes to upgrade their fleets. In Asia, airlines need new planes to keep up with population growth and increased air travel. All of this bodes well for General Electric aircraft engines.
The problem for Kenmore is that it's part of Sears. There haven't been many positives one can say about Sears over the many years. In many ways, you can say that the company is extremely undervalued. You might also say that the stock is a value trap and that the company is in more trouble than it appears.
For Sears to get going again, I think the company needs to embrace its Kenmore appliance division. Kenmore appliances, along with Craftsmen tools and equipment, are two of the most popular and enduring brands in the world. I can remember growing up with both Kenmore appliances and Craftsmen tools in my house. Sears still has a great name overseas, and if the company can leverage that with its Kenmore and Craftsmen brands then it would be a formidable competitor to a company like Whirlpool.
This is highly unlikely, though, as CEO Eddie Lampert is more concerned with unlocking value and not growth. His focus is on the company's undervalued real estate assets and not in growing the company and its brands. I think this is a mistake and explains why the stock is down almost 10% in the past year.
I like the consumer appliance business and see opportunities for growth as housing recovers. As incomes rise in developing markets, demand is there as well for home appliances. Whirlpool is a pure play on the home appliance business and offers continued upside with its business model.
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Mark Yagalla has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!