Why Is This Company an Excellent Play on the Housing Recovery?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The leading manufacturer of home appliances, Whirlpool (NYSE: WHR), has annual sales in excess of $18 billion coming from countries all around the world. Despite its size, Whirlpool has enormous growth potential that I feel is not fully priced into its shares. Several factors such as the improving U.S. housing market, increasing emerging market demand, and increased efficiency of their operations should produce double-digit earnings growth for Whirlpool for years to come. Let’s take a quick look at Whirlpool, where it’s heading, and whether or not another appliance maker would be a better investment.
As mentioned, Whirlpool is the world’s largest manufacturer of appliances, with most of their products intended for home use. The company produces laundry appliances (30% of sales), refrigerators and freezers (30%), cooking appliances (17%), and other appliances (23%) which include dishwashers and small appliances.
While most of Whirlpool’s sales (52%) still come from North America, the company has a very large (and growing) international presence, particularly in Latin America. About 27% of the company’s sales come from the region, with the rest coming from mostly Europe and Asia. Whirlpool produces its appliances under several well-known brand names, including Whirlpool, Maytag, KitchenAid, Jenn-Air, Magic Chef, and others.
Growth and valuation
Sales of appliances have historically been correlated with the strength of the housing market. As a result, Whirlpool’s sales have been on a general decline since 2007, but have not suffered as much as other appliance manufacturers. According to IBISWorld, revenues of appliance manufacturers have fallen by an average annual rate of around 5.2% since the housing decline began, while Whirlpool’s sales have dropped from $19.4 billion to $18.1 billion in that time period, or an average annual decrease of just 1.3%.
This has been mostly fueled by Whirlpool’s impressive Latin American growth, and is expected to improve even more in the coming years as the U.S. housing market finally begins to significantly improve. The combination of this (particularly new home construction), and annual sales growth of around 5% in both Latin America and Asia should more than offset any weakness from Europe. Additionally, operating margins are expected to improve over the next few years due to increased efficiency and better pricing power that comes with a stronger economy.
Whirlpool is expected to earn $9.72 this year, increasing to $11.37 and $13.26 in 2014 and 2015, respectively, according to the consensus of analysts who cover the company. This translates to annual earnings growth of 17% and 16.6%, which more than justifies the current P/E of 17.8 times trailing twelve month earnings that Whirlpool currently trades for. Additionally, Whirlpool has relatively low net debt (debt minus cash), which has dropped by about 40% since 2009.
Alternatives: Electrolux and Sears
The largest publicly-traded pure appliance play other than Whirlpool is Electrolux (NASDAQOTH: ELUXY.PK), which is just slightly smaller in terms of market cap. Electrolux pays a significantly higher dividend yield (3.8% vs. 2%), but that is the only reason I see to like it better. Electrolux trades for 22.6 times trailing earnings with almost the same projected growth rate as Whirlpool. Additionally, the company has a higher level of European exposure, which creates added risk and uncertainty in the near future.
Another option is to invest in a company that only gets some of its revenue from sales of appliances, such as Sears Holdings (NASDAQ: SHLD), which controls the Kenmore appliance brand. The actual products are produced by other manufacturers (including both Whirlpool and Electrolux, among others), and make up a considerable part of Sears’ sales. The upside to an investment like this is that you get exposure to other aspects of retail than just appliances. The downside is that Sears is a very speculative play at this point, having lost money for the last few years and projected to continue to lose money (but smaller losses) until 2015, at least.
However, if Sears manages to turn things around it could be the big winner out of this group. Sears has revenues of about $40 billion annually and trades at a market cap of just $4.6 billion, which tells me that it wouldn’t take that much of a profit margin to add significant value to the company.
Buy, sell, or hold?
As far as Whirlpool goes, I think it is clearly the best long-term investment candidate in the appliance sector. With a low valuation and excellent growth potential, this could be one of the best plays on the housing recovery in the U.S. that finally appears to have arrived.
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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!