Trade war fears are driving WHR down to REALLY interesting value levels

July 24, 2018

Trade war fears are driving WHR down to REALLY interesting value levels

Since the beginning of the month, the stock market has shown some positive momentum, with the S&P 500 driving from around 2,700 to a little above 2,800 as of this writing. That boost seems to come in spite of trade tensions, which always seem to be lurking close by and ready to start grabbing headlines and investor’s attention all over again. Today another wrinkle seems to be making its way into the storyline, as the Trump administration appears ready to make about $30 billion in emergency aid available to U.S. farmers that have been negatively impacted by tariffs. That certainly seems like a tacit acknowledgement that a trade war is really hurting Americans, and that more pain could be coming in the near future since the administration doesn’t seem to be changing its tone or approach in any meaningful way.

The truth is that any actual impact of tariffs – from the U.S. on another nation, or vice versa – isn’t likely to be seen on an immediate basis. The markets, however are emotional by nature, which means that they usually react as much, if not more, to the perception of news more than to its reality. That’s why the entire semiconductor sector, with massive exposure to China has seen its practically uninterrupted momentum of nearly nine years fade over the last few months and even turn bearish since early June. The same is true of industrial stocks, where steel and aluminum tariffs have muted enthusiasm for stocks in that sector despite recent, generally positive earnings growth.

It is also true that increased globalization, facilitated by technological advancement in practically every economic sector means that most companies that have been successful at growing revenues and profits over the last two decades or more have done so by extending their reach far beyond their own national borders. That means that almost no matter what business you look at, how well-established it may be, or what its perception as a “national icon” may be, if you dive deeper into its business you’ll find that tariffs between any, or all of the nations embroiled in trade tensions is exposed to a heightened risk of increased costs from tariffs. As investors, that means it can be hard to figure out how to invest actively, but conservatively by limiting your own exposure. 

The concern over tariffs is an important element to consider when you’re thinking about Whirlpool Corp. (WHR), which is a stock that anybody should be able to recognize easily; there is, after all an excellent chance that you have one or more Whirlpool or Maytag appliances in your own home. The company reported earnings this morning that missed most analyst’s expectations; management also lowered their profit outlook for the rest of the year and cited increased costs of steel and resin as well as freight. One of the factors that the company cited for those increased costs included tariffs imposed by the Trump administration on steel imports (although the implication from the conference call was that they were just one contributor, and not the biggest one). The news sent the stock plunging more than 14% below yesterday’s closing price. 

The company also faces intense competition from South Korean companies like Samsung and LG, but still remains one of the largest home appliance (large or small) manufacturers and markets in the world. How does WHR shield you from trade risk, especially when they are citing tariffs as an element that is increasing their costs? While the company operates globally, it also localizes its manufacturing operations, which means that products sold in the U.S. are manufactured in the U.S., products sold in Europe are manufactured in Europe, and so on. Despite its global footprint, North America remains its largest market, with more than 54% of all sales in 2017 coming locally. By comparison, 23% came from Europe, the Middle East, and Africa, 16% came from Latin America, and only about 7% from Asia. WHR’s CEO also indicated that because the company negotiates annual contracts for the steel they buy, they hadn’t been strongly affected in the last quarter by steel tariffs; however it does raise some concern that the longer the tariffs persist, the more direct the impact will be, which appears to be a reason for the lowered profit forecast. Even so, the company remains profitable, with strong, positive cash flow, continued market leadership and a dividend yield far above the S&P 500 average, but that remains conservative from a payout ratio perspective. The bonus for a value-oriented investor is that the stock’s overnight drop really puts its price at a deeply discounted level that is attractive for those willing to work with a long-term perspective.

Whirlpool Corp. (WHR)

Current Price: $129.96

    • Earnings and Sales Growth: Earnings decreased from $3.35 a year ago to $3.20 in the most recent quarter. The market was expecting to see a year-over-year increase to $3.69 per share. Revenues also missed the mark, dropping to $5.14 billion versus $5.35 billion a year ago. While the market is reacting negatively to the fact that the numbers missed analysts expectations, I think it’s constructive to put the year-over-year decline in perspective; the earnings drop is about 4.4%, while revenues dropped by about 3.9%. That isn’t insignificant, especially if you think about it on an annualized basis and consider that the global economy has generally been healthy. Don’t make the mistake, however of attributing the drop just to trade war concerns. Other factors that had an impact, for example was a trucker strike in Brazil that impacted WHR’s business in Latin America and could continue to show softness until its general elections in October are settled, as well as sales declines in the EMEA portion of their business.
    • Free Cash Flow: WHR’s Free Cash Flow is healthy, and their balance sheet indicates they have good liquidity, with more than $1 billion in cash and liquid assets to supplement healthy operating margins.

  • Debt to Equity: WHR has a debt/equity ratio of .80 as of the quarter prior. Long-term debt has increased since the end of 2017 by about 10%, and so I expect this number is going to go up somewhat. Their balance sheet however implies that operating margins remain healthy and more than adequate to service their debt, with good cash and liquid assets to provide additional flexibility.
  • Dividend: WHR pays an annual dividend of $4.60 per share, which at its current price translates to a dividend yield of about 3.54%, well above the S&P 500 average of 2%. Its dividend offers an attractive yield for patient investors who would be willing to hold the stock and wait for its trend to shift back to the upside.
  • Recent Price Action: The stock has been trending lower for the past year, hitting a high in July of last year at about $200 before tapering lower from that point. Its current price marks a 23% decline from its 52-week high, and therein lies the opportunity. The stock hit a trend low point in late June at around $142 before rebounding a bit. The stock plunged overnight due to the pre-market earnings call to its current level as the market is reacting in an extreme way to the earnings miss and the lowered forecast. The acknowledgement that tariffs are playing a role seems to simply be adding fuel to that fire for now, but from a value standpoint it’s really just creating an even better value proposition. Given the company’s strong fundamental profile, its current price could be considered a good value. It is now trading only about 1.7 times above its latest Book Value, while its historical average is about 2.6. That puts a long-term price at around $191 – near to its 52-week highs. Adding to its value argument is the fact that at its current price, it is trading at less than ten times forward-looking earnings, while the average for stocks in the S&P 500 Index right now is 17.1.