I have some mighty fine Whirlpool (NYSE:WHR[1]) appliances in my home, and have had them for a long time. I have no problem with their products, but I have a problem with the stock. As I wrote the other day[2], it is one of these companies that is neither a consumer staple or a luxury retailer, and that means it’s caught in a terrible spot economically. It is a highly sensitive cyclical company, and because the “middle market” of consumer expenditures known as consumer discretionary is not doing well, neither is the stock or the company.
I often talk about how great it is when a company is a global brand name. That certainly is true of Whirlpool, but in this case, Europe is having so much trouble economically that the region really is hurting the company as a whole. But there are serious systemic issues remaining in the overall economy that will have Whirlpool’s back against the wall for some time.
Think about when you buy an appliance — when you move into a home, or after five to 10 years when your current appliance starts getting wonky. Now take a look at the housing situation in America. Tons of unsold inventory. Lowest new starts in decades.
Meanwhile, raw material costs are rising. This is coming at a terrible time when coupled with restricted consumer discretionary expenditures, so those costs are going to impact gross margins. Then there’s competition. Yes, I said I have Whirlpool products in my home. But you know which company I purchased my washer and dryer from? Samsung (PINK:SSNLF[3]). Like many consumers, I do my research online, and the Samsung equipment got great reviews. When a company known for stereo equipment moves into appliances, and you’re Whirlpool, you’ve got problems. Then there are labor issues — as in, the labor force is too large for a company that is struggling. Fortunately, management says it’ll cut 5000 workers, so that should help.
The question for investors is whether Whirlpool might present a value over the long term and is therefore a buy, or if things are so bad that it’s a short. Let’s look at financials.
The balance sheet seems to be holding up, with $1.1 billion in cash against $2.1 billion in debt. Debt is getting repaid rather aggressively — $313 million in 2011 on top of a half-billion the previous two years — and debt service is more than covered by earnings. However, free cash flow went negative by about $100 million in 2011, and that’s not a trend we want to see continue.
With the exception of obviously vastly overpriced momentum stocks, I really only short stocks when bankruptcy seems inevitable[4]. Whirlpool is nowhere near that scenario. The company trades at about 12 times FY 2012 earnings, which really isn’t all that unreasonable, but it certainly is not a value play. I suggest selling if you hold it and reallocating that capital toward something like General Electric (NYSE:GE[5]).
As of this writing, Lawrence Meyers[6] did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc.[7], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com[8]. He also has written two books[9] and blogs about public policy[10], journalistic integrity[11], popular culture[12] and world affairs[13].