With the stock market pushing down to test levels near its lowest points from earlier this year, a lot of investors are on edge right now. The market is back into correction territory, and has pushed below its more recent low point around the end of October. A continued decline will not only steepen the severity of the correction, but also increase speculation, uncertainty and risk that the market will finally, after a practically uninterrupted bullish run of more than nine years, move into legitimate bear market territory.
The market’s broad decline over the last few months, and indeed its volatility throughout the year, has been fueled by a number of factors, but perhaps can be boiled down right now to two principal concerns: tariffs and interest rates. Trade tensions lately have been tempered by the hope that a compromise between the U.S. and China is near, as both countries have agreed to pause the imposition of new tariffs while they restarted constructive talks on the issues that have driven the conflict to this point. That remains an element of risk, but it does represent a mostly positive move right now.
Interest rates have always acted as a barometer of general economic health, but while rates currently remain near historical lows despite their gradually increasing pace since late 2015, the market really seems to be reacting more to the spectre that rates are expected continue to increase. Investors have become so conditioned to an incredibly accommodative Fed policy for more than a decade that anything less seems to be taken as a sign that the economy isn’t likely to be able to maintain its healthy growth levels.
How does this broad market backdrop relate to Whirlpool Corp (WHR), the home appliance manufacturer? Trade peace is something that I would expect should benefit a stock like WHR; in July, management cited tariffs on steel and aluminum as negative factors impacting their expected earnings growth for the next year from that point. Compromise between the U.S. and its trading partners on this front is something that should make it easier for the company’s prospects. The stock is down big since June of 2017, having dropped from a high at around $200 per share to its current level around $113. Most of that decline has come over the past 12 months, since the stock is down over that period by more than 32%. That’s a decline of both degree and time that translates to a long-term bear market, and by itself starts to prompt interest from most value-oriented investors. Does that decline, however translate to actual bargain-based opportunity, or a value trap on a stock near multi-year lows with even more downside on the horizon? You decide.
Fundamental and Value Profile
Whirlpool Corporation is a manufacturer and marketer of home appliances. The Company’s segments include North America; Europe, Middle East and Africa (EMEA); Latin America, and Asia. In North America, the Company markets and distributes home appliances and small domestic appliances under a range of brand names. In EMEA, it markets and distributes its home appliances primarily under the Whirlpool, Bauknecht, Ignis, Maytag, Laden, Indesit and Privileg brand names, and domestic appliances under the KitchenAid, Hotpoint and Hotpoint-Ariston brand names. In Latin America, it markets and distributes its home appliances and small domestic appliances primarily under the Consul, Brastemp, Whirlpool and KitchenAid brand names. The Company markets and distributes its products in Asia primarily under the Whirlpool, Maytag, KitchenAid, Amana, Bauknecht, Jenn-Air, Diqua and Royalstar brand names. It manufactures and markets a line of home appliances and related products. WHR’s current market cap is $7.2 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased more than 18%, while sales declined about -1.7%. The picture has gotten quite a bit better over the last quarter, as earnings increased about 42% while sales improved more than 3.5%. The company’s margin profile has also improved noticeably over the past three months, from -2.9% over the last year to almost 4% in the last quarter.
- Free Cash Flow: WHR’s free cash flow is not great; at only $122 million, it translates to Free Cash Flow Yield of only 1.68%. This is a reflection of the company’s negative margin profile over the last year.
- Debt to Equity: WHR has a debt/equity ratio of 1.44, which has increased from a much more conservative level of .8 two quarters ago. The company’s balance sheet does indicate that their operating profits are sufficient to service the debt they have.
- Dividend: WHR pays an annual dividend of $4.60 per share, which translates to an impressive yield of about 4.06%.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WHR is only $51.84, and which translates to a Price/Book ratio of 2.18 at the stock’s current price. Their historical average Price/Book ratio is 2.6, which means the stock would be considered about 16% undervalued right now.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: This chart covers the last 2 years and makes the stock’s extended downward trend easy to see. The stock hit a multi-year low at around $102 per share in late October but then rallied almost 25% before dropping back again in the last week or so. Immediate resistance is around $125, with major support at the 52-week low point. While a break above $125 should be a positive for the stock in the short term, the stock would probably need to fill the gap it created in July of this year by moving above $145 before most traders would consider the long-term trend as being properly reversed to the upside. If the stock drops below $102, its next most likely support level from previous pivot levels will probably not be seen until around $85 .
- Near-term Keys: The stock’s current price makes it hard to say that there is any kind of immediate trading setup on either the bullish or bearish side. A break above $125 could be a good signal to buy the stock or start working with call options, while a drop below $102 would mark a good signal to short the stock or buy options. Is the stock’s current price low enough to make it a good value buy at current levels? I don’t think so; there is plenty of broad market risk that I think could keep pushing this stock lower, so I wouldn’t start to look for a real value-based entry point until the stock dropped nearer to its 52-week low around $102.