Whirlpool Corporation (NYSE:WHR) reported miserable earnings Apr. 23, missing on both the top and bottom line. If that news wasn’t negative enough for WHR stock, the company’s outlook for 2018 earnings was also below analyst expectations.
It’s not a good time to be a Whirlpool shareholder. If you’ve owned WHR stock for the last two years, you’ve seen zero appreciation in the value of your investment.
If not for the $1.15 quarterly dividend, you’d have nothing to show during a two-year time span that saw the S&P 500 rise by 43%.
Now trading around $155, investors are right to wonder whether WHR stock is a value buy or a value trap.
Why WHR Is a Value Buy
Whirlpool expects its fiscal 2018 GAAP earnings to be between $12.30 and $13.30 a share. Analysts are expecting $13.68 a share. Considering Whirlpool has missed analyst earnings estimates in six of the last seven quarters, I think it’s safe to assume the company won’t hit that number, so I’ll go with the $12.80 midpoint.
That’s a forward P/E of 12.2, well below its five-year average of 17.6. It also has a very low PEG ratio of 1.1 and a payback of 6.6 years. Based on its forward P/E and PEG ratio, we’re talking about 11% annual growth in earnings, which isn’t too bad for an American manufacturer these days.
Looking at its Q1 2018 report, the big positive I take from its results is that Whirlpool’s North American business, which accounts for 50% of the company’s revenue, saw revenues increase by 2.5% with a 4.7% increase in EBIT.
So, it’s not all bad news coming out of Whirlpool HQ.
Lastly, the company expects 2018 free cash flow of at least $1 billion. Based on an $11-billion market cap, $4.2 billion in long-term debt and $1 billion in cash, WHR has a free cash flow yield of 7.8%, which is very close to entering value territory.
Why WHR Is a Value Trap
Goldman Sachs Group Inc (NYSE:GS) analyst Samuel Eisner recently downgraded Whirlpool stock from “Neutral” to “Sell” while also lowering his price target from $164 to $135, around 13% below where it currently trades.
Eisner contends that Whirlpool will continue to face increased pressure from its Asian competitors. Add to that rising steel costs due to Trump’s tariff, and you have a business that will sell fewer appliances and generate lower margins on the ones it does sell.
That’s a losing proposition in Eisner’s opinion.
He also mentions that Whirlpool does a terrible job converting income to free cash flow. In 2017, it had free cash flow of $707 million and an operating profit of $1.1 billion for a 64% conversion rate. In 2016, it converted just 46% of its operating profit to free cash flow.
Meanwhile, Goldman Sachs suggests its peers are converting 100% of their income to free cash flow.
Should You Buy WHR Stock?
In December 2011, I recommended WHR stock as a bounce-back stock in 2012. It delivered an annual return of 110%.
Back then, Whirlpool was looking to deliver annual revenue growth of at least 5%, 10% growth in earnings per share and 8% operating margins.
Whirlpool came close to hitting 8% operating margins in 2013, but it hasn’t been any closer since. Nothing in the company’s Q1 2018 results suggests this number is even on its radar. Right now, Whirlpool’s merely trying to hang on.
At this point, I’d lean toward Whirlpool being a value buy, but I wouldn’t use your retirement portfolio to place a bet because the next 12-24 months could be a very bumpy ride.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.