WHR - Whirlpool - Getting Washed

Summary

• Investors in Whirlpool Corporation have seen a very tough 2022 after a very strong 2021.
• The company announced an expensive deal, while shedding non-core assets at very low prices.
• This dealmaking and higher leverage create some questions marks, as the pro forma situation is quite unclear.
• Current valuations appear low, but the track record is too soft to see appeal.

In November, I concluded that Whirlpool Corporation ( WHR ) was focusing on North America as the company was dialing down its global ambitions, focusing on the higher value and more profitable core operations at home. This made sense, since the company has been struggling for years now in non-core markets.

Amidst this and tougher market conditions, which raised some initial questions on the balance sheet integrity, Whirlpool Corporation's appeal was luring if the company could execute.

A Recap

Whirlpool is a well-known consumer-focused branded appliance company which includes its namesake brand as well as Maytag and Bauknecht. The company generated $21 billion in sales in 2017, posting 6% margins in the meantime, as the sales results had not kept up with inflation in the decade ahead.

The business relied on its activities and profits in North America, while operations in Latin America, Asia, and EMEA were posting low margins, if posting any positive margins at all. At the time, Whirlpool posted adjusted earnings around $14 per share as the company traded around the $150 mark at the time.

Being a prime beneficiary of the post-pandemic rally, with consumers spending vast amounts of money on homes and appliances, Whirlpool Corporation shares rose to the $250 mark early in 2021, only to ever since come down to $150 when I last looked in November.

After reported sales down to $19.4 billion in 2020, the company managed to post earnings at more than $18 per share on the back of margin improvements and share buybacks (vs the situation in 2017). Revenues rose to $22.0 billion in 2021, as earnings improved rather spectacularly to $26.50 per share in an almost perfect operating environment.

Whirlpool Corporation guided for 2022 sales to rise in a more modest fashion, with revenues seen up 5-6%, as earnings were seen between $27 and $28 per share. After having deleveraged quite a bit in 2021, the company announced a 25% increase in the dividend payout to $7 per share, and announced a big share buyback program as well. Following inflationary pressures and demand softness (most notably in the EMEA region), Whirlpool Corporation cut the earnings guidance in a few steps to $23 per share, as demand was clearly fading as well, with the company now anticipating sales declines instead of growth.

Fetching a $12 billion enterprise valuation at $150, the company made a huge move in August, announcing a $3 billion deal to acquire the InSinkErator business from Emerson Electric ( EMR ) . The purchase of a quality food waste disposer and instant hot water dispenser looked a bit odd from a timing and valuation perspective, as the company clearly communicated a retreat from EMEA. A $6.4 billion net debt load overnight was a bit of an attention point, certainly as the company cut the earnings guidance to just $19 per share alongside the third quarter results being released.

While I was warming up to Whirlpool for the valuation, a bit more conservative leverage practices and execution would have been very welcomed.

EMEA Divestment

The much anticipated EMEA divestment happened in January, as Whirlpool Corporation announced that it has reached a deal to contribute its European major domestic appliance business to Arcelik S.A, in a merger of a new company in which it will continue to hold a 25% equity stake, that is a business which is set to generate EUR 6 billion in sales and see EUR 200 million in costs synergies.

Whirlpool Corporation announced a huge $1.5 billion impairment charge in relation to the deal, but the retained value is probably less. That being said, the business was essentially only breaking even in a strong 2021 on $4.2 billion in sales, with sales and earnings worsening through 2022. Shares hardly reacted to the news, but fair to say that this was a disappointing result for Whirlpool, yet investors appear to be just glad that the company has taken this decision.

And Now?

Amidst all the Whirlpool Corporation moving parts, it is hard to see the current pro forma implications post the EMEA divestment, which will still take a while and will likely overshadow the 2023 results as well. Hence, I see Whirlpool Corporation's appeal based on the cheap valuation, yet continued restructuring, higher leverage, expensive acquisitions and cheap divestments, create a turbulent story. Given this uncertainty, I do not see a huge reason to get involved with Whirlpool Corporation just yet, as the operational turbulence seems likely to last a little longer.

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