I have some mighty fine Whirlpool (NYSE:WHR) 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, 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). 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. 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).
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.