Monday, May 28, 2012

Whirlpool: Not Interesting At This Point In The Cycle

One of the biggest gainers in yesterday's session was Whirlpool (WHR) which announced some decent fourth quarter earnings and at the same time issued a rosy outlook for 2012 despite a slowdown in its European operations. The market responded very favorably to the announcements of the maker of Bauknecht, Maytag and Whirlpool and sent shares up 13% to $61. This is the highest level since October 2011 when the company announced weaker growth and aggressively lowered its 2011 earnings target.

Fourth quarter results
Despite a 2.5% drop in revenue to $4.9 billion, the company saw its earnings rise 20% to $205 million or $2.62 per share. Analysts expected a slight drop in earnings to $1.96 per share. The increase in earnings is entirely attributable to its US business which saw a strong margin improvement and slight revenue growth for the quarter. Other regions, notably Europe, saw their revenues decline and Whirlpool mentioned specifically a lack of demand for this region in the final months of the year.

Full year results
For the entire year of 2011 revenue was actually up 1% to $18.6 billion with net profits down 37% to $390 million or $4.99 per share after a disappointing second quarter. All regions saw their revenues rise for the full year except the US business which comprises about half of Whirlpool's revenue. For the final quarter things reversed and the US saw its revenue increase on an annual basis while all other regions (Europe, Asia and Latin America) saw a decline in year-on-year revenue.

Outlook
Management is upbeat for the year 2012 and expects net earnings to come in at $5.00-$5.50 despite restructuring costs which could total about $1.50 a share or $120 million and a markedly slowdown in Europe. It expects revenue growth in all other geographic regions with continuing pricing initiatives and an increase in productivity. Whirlpool is concerned about cost inflation as many of its raw materials are tied to oil prices.

Volatile business, low earnings visibility
Whirlpools business is extremely cyclical and the low-margins provide extreme fluctuations in profitability and thereby in the share price. During the global recession in 2009 shares hit $15 per share, to rise to over $100 in 2010. In 2011 shares slumped back to $45 in December, now exchanging hands at $60. With no structural growth in revenue and margins over the last years, shares are not obviously cheap at 12 times 2011 earnings. While a $2.00 annual dividend might provide some stability in the long run shares are not interesting enough at this point in the cycle.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

No comments:

Post a Comment