Whirlpool (NYSE:WHR) missed on Q2 estimates. The Benton Harbor, Michigan-based appliance giant fell short of earnings by a wide margin. As a result, WHR stock saw a huge selloff in morning trading. Whirlpool also missed estimates in three of the previous four quarters, and such a miss now casts further doubts on the stock’s longer-term prospects.
However, despite these misgivings, the fundamentals indicate a strange truth — WHR stock is a buy.
WHR Stock and the Massive Earnings Miss
Such a revelation sounds counterintuitive given the earnings report. Whirlpool reported Q2 earnings of $3.20-per-share. Wall Street had expected earnings-per-share of $3.69 — almost 40-cents-per-share more than what was reported. It also represents an unexpected decline from the same quarter last year when WHR reported EPS of $3.35.
Revenues of $5.14 billion also missed estimates by $150 million. The company reported $5.35 billion in revenue in Q2 of last year. CEO Marc Bitzer cited weakness in the Europe, Middle East and Africa (EMEA) region. Non-cash charges of $860 million coming from the EMEA region hurt WHR’s profitability this quarter.
But EMEA was not the only region that experienced a decline in sales. Revenues from Latin America also fell, while sales in North America remained steady. Asia became the only growth region last quarter. Revenues grew by 14.5% in this region, excluding currency-related impacts.
The company also lowered its profit outlook. Whirlpool now expects 2018 earnings in the $14.20 to $14.80 range. This falls well below previous consensus estimates of $15.63-per-share. All of this bad news sent WHR stock tumbling in early morning trading. In fact, the stock price fell into the $130-per-share range in following the earnings announcement.
Although I do not foresee the demise of Whirlpool stock, this report bodes poorly for both the company and its management. This sales decline occurred when the world economy has shown strength overall. Further, the company had repurchased $1 billion worth of Whirlpool stock since the April earnings announcement. In that time, the stock has declined by about 20%.
One has to wonder if spending $1 billion on product development, factory upgrades and market expansion in Asia would not have served WHR stock better?
The Decline Makes Whirlpool Stock a Buy
The silver lining in this massive decline involves the formation of what could become a profitable buying opportunity. One reason relates to the dividend. The dividend has increased every year since 2011 and now stands at $4.60-per-share. With the lower stock price, the dividend yield currently holds in the 3.5% range.
Also, the decline takes the forward price-to-earnings ratio below 10. The P/E in this industry rarely matches the S&P 500 average of around 24. However, the multiple rarely falls as far as the single digits. This leads to the grudging admission that WHR stock has become a buy.
This may sound like a strange conclusion when the company misses on earnings more often than not. However, the company still holds up well in many respects.
For all its faults, Whirlpool remains a profitable, cash flow positive business, maintaining market leadership over General Electric (NYSE:GE), Electrolux (OTCMKTS:ELUXY) and others. Despite falling profits and a high dividend yield, it earns enough to continue with its dividend increases for the time being. Moreover, the multiple has not spent significant time in the single digits since the last financial crisis. Historically, such a valuation indicates a buying opportunity. So, despite mediocre leadership and questionable decision-making, investors need to look at Whirlpool stock.
Bottom Line on WHR
A disappointing earnings report and a subsequent decline in the outlook and the stock price lead to a strange conclusion — WHR stock has become a buy. The stock fell hard in morning trading as earnings missed and earnings guidance fell by wide margins.
Still, despite these failures, some favorable metrics emerged. Whirlpool remained profitable and cash flow positive. Moreover, the massive selloff increases its appeal to value investors. It now supports a P/E ratio below 10 and a 3.5% dividend yield in a rising dividend environment.
WHR stockholders have plenty of reasons for unhappiness. However, this unhappiness has turned the stock into a value investment with a high dividend yield and a continually profitable company to back it up. Sometimes investors should ignore the drama and make a decision based on the numbers. It appears that time has come for WHR stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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