Whirlpool Corporation Annual Valuation – 2014 $WHR
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor with High Dividend Yields.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Whirlpool Corporation (WHR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Whirlpool Corporation (Whirlpool) is a manufacturer and marketer of home appliances. Whirlpool operates in four segments: North America, Latin America, EMEA (Europe, Middle East and Africa) and Asia. Whirlpool manufactures and markets a line of home appliances and related products. Its principal products are laundry appliances, refrigerators and freezers, cooking appliances, dishwashers, mixers and other portable household appliances. The Company also produces hermetic compressors for refrigeration systems. It is a producer of home appliances in North America and Latin America and has a presence in markets throughout Europe and India. Its portfolio of brands includes Whirlpool, Maytag, KitchenAid, Brastemp and Consul.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $143.89 |
| MG Value | $164.02 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $125.52 |
| Value Based on 0% Growth | $73.58 |
| Market Implied Growth Rate | 4.06% |
| Net Current Asset Value (NCAV) | -$42.60 |
| PEmg | 16.62 |
| Current Ratio | 1.15 |
| PB Ratio | 2.14 |
Balance Sheet – 6/30/2014
| Current Assets | $7,045,000,000 |
| Current Liabilities | $6,118,000,000 |
| Total Debt | $2,461,000,000 |
| Total Assets | $15,608,000,000 |
| Intangible Assets | $3,415,000,000 |
| Total Liabilities | $10,368,000,000 |
| Outstanding Shares | 78,000,000 |
Earnings Per ShareÂ
| 2014 (estimate) | $11.15 |
| 2013 | $10.24 |
| 2012 | $5.06 |
| 2011 | $4.99 |
| 2010 | $7.98 |
| 2009 | $4.34 |
| 2008 | $5.50 |
| 2007 | $8.10 |
| 2006 | $6.35 |
| 2005 | $6.18 |
| 2004 | $5.90 |
Earnings Per Share – ModernGraham
| 2014 (estimate) | $8.66 |
| 2013 | $7.11 |
| 2012 | $5.56 |
| 2011 | $5.93 |
| 2010 | $6.42 |
| 2009 | $5.79 |
Dividend History
WHR Dividend data by YCharts
Conclusion:
Whirlpool is not suitable for either the Defensive Investor or the Enterprising Investor at this time.  The Defensive Investor is concerned by the low current ratio and the insufficient growth over the last ten years, while the Enterprising Investor has issues with the high level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of General Electric (GE).  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $6.42 in 2010 to an estimated $8.66 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 4.06% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.
Be sure to check out the previous ModernGraham valuations of Whirlpool Corporation (WHR) for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Whirlpool (WHR)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in Whirlpool (WHR) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
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In January of 2012, WHR was trading at $40. Margins has just missed and forecast was down as management lowered its sales expectation. Cash flow was negative and liquidity was a problem as required outflows were well above existing cash generation. In response, WHR made drastic cuts. They cut capacity and costs; raised prices; and attempted to produce products with better margins. The street rewarded the company for these drastic cost cutting measures and by January of this year the stock was speculated up to $160.
This year, however, it became apparent that the company was still not out of the red despite it’s massive restructuring efforts. WHR’s revenue growth trailed the industry average; the company had a problem covering short-term cash needs; earnings per share declined by 35% by the end of the first quarter; and earnings were inconsistent at best.
Then came this quarter’s results which showed net sales were down by $80M; net earnings dropped 10%; cash on hand dropped by $400M; inventories increased by 15%; and the company missed earnings by $.29.
Fettig in 2013 admitted that “If we’re not growing our Asia business 15-20% per year we’re not doing what we should beâ€. Asia sales fell 9% in Q2. To further compound the problem, the company just spent $1B for Indesit which reported revenues were down 8% in 2013 and had declines in sales volume and drops in operating profits. They also acquired a 51% stake in Hefei Sanyo ($550M), a company that is a distant third in China’s appliance market which is saturated with large numbers of local appliance manufacturers constantly slashing prices. In fact, WHR customers in China and Europe are reducing inventories.
The conference call was very telling: “we’ve managed through a challenging short-term global demand environment”, “Europe … flat … Latin America … flat … Asia … flat”, “lower unit volumes, higher material cost”, “price increases will impact the second half”, and “capital expenditures [will increase by] between $625 million and $675 million for the year”.
In essence, a company with $10B in market cap bought Sanyo to make up for revenue they are losing in Asia and Indesit to keep pace with revenues in Europe at a cost of $1.5B. In the US, fewer Americans signed contracts to buy homes in June, as the real estate market appears to have cooled off this summer.
The stock has strong support at $130 and strong resistance at $160. It presently sits at $145 but appears to be making lower highs and lower lows within that range. It is very likely that in the next few days the stock will test the support of $130 given the disappointing Q2 results.