Whirlpool: Betting On A U.S. Manufacturing Recovery

seekingalpha11-09

Whirlpool faces potential short-term strains but possible long-term benefits from the Trump administration's efforts to improve US manufacturing activity.Despite recent financial struggles, including ...

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I expect pressures in the short term but see it as a reasonable long-term value investment.simonkr/E+ via Getty Images  From 2018 to 2023, the US had a tariff policy on washing machines. The tariff was initially set at 20% for the first 1.2M units and 50% above that, with reductions through 2021. The tariffs were then extended to 2023 and ended early last year. Now that Trump won with a Republican trifecta, there is a fair amount of speculation that this policy will return in some form. Whirlpool Corporation (NYSE:WHR) is exposed to this policy change, either directly through potential changes in washing machine tariffs or indirectly through tariffs in general. Though there are no concrete plans regarding policy changes currently, I think it is reasonable to assume that investors should brace for them. I have had a bearish view on WHR since tariffs expired in early 2023. I believe that US manufacturing is not competitive in the current environment and that US consumers, particularly at the median, have lost buying power for durable goods. Regarding potential policy changes, tariffs may eventually improve Whirlpool's competitive position in US manufacturing; however, they may also weaken sales by raising consumer prices. Thus, I see the incoming administration as offering potential short-term strains on Whirlpool while potentially improving its long-term competitive position as a US manufacturing company. Further, because Whirlpool is a brand-name American manufacturing company, I expect large job cuts or significant headwinds might reflect poorly on the incoming administration. Trump has had a long-standing relationship with the company, possibly giving it some risk protection or upside. Still, to determine that, we must look at the data regarding its 2017-2021 performance and assess how much of that was based on government policy changes, giving us a clue regarding how Whirlpool may change over the coming years. Whirlpool's Fate Depends on Many Factors WHR rose 4.5% from November 4th to November 8th, with most gains occurring on November 6th following the election. This bounce was not as significant as seen in many stocks, but it is still notable as it indicates that the market considers the result a net positive for Whirlpool. Still, it is worth pointing out that the company did not perform particularly well during that period. Its employee count has declined dramatically from 2017 through today, with its revenue and share price generally following suit: Data by YCharts Although tariffs are an interesting aspect of Whirlpool's performance, they are not likely the primary economic factor. The stimulus surge in 2020, combined with job cuts, gave Whirlpool immense sales growth and lower expenses in 2021. That was met with lower demand for 2022 onward, higher input costs (supply chain issues), and continued job cuts and divestment. Its financial position has deteriorated dramatically since 2021. Its working capital is negative, its financial debt-to-EBITDA is nearly 7X, and its times interest-earned is relatively low at ~2.2X. Its gross margins are also stuck at a new low level: Data by YCharts Based on these figures, Whirlpool seems relatively stagnant from 2017 to 2020. The pandemic, combined with stimulus, created a massive negative and positive catalyst for the company but ultimately left it in a materially weaker position than before 2020. Economic Trend is Weak But Could Recover In my opinion, the company's difficulties are not the result of government decisions. Though they are a factor, Whirlpool's managers have slowly adapted to ongoing economic changes and have only recently focused on divesting non-core segments. Much of its sales result from home sales activity, which remains extremely low due to poor home affordability. With mortgage rates spiking after the election, the issue is unlikely to be resolved soon. Consumer confidence has also been shallow, as well as the manufacturing PMI in general, implying Whirlpool's issues are primarily the result of the US manufacturing recession. See below: Data by YCharts The US manufacturing PMI has signaled a contraction in activity (below 50) since 2022. Consumer sentiment is up from \"peak inflation\" lows but still has a way to go before normalizing. However, US manufacturing payrolls have declined despite reasonable overall US job growth in 2024. Home sales are extremely low, and I do not expect they will recover until mortgage rates fall, and there are no indications of that happening now. I believe reductions in the short-term Federal Reserve rates may raise long-term mortgage rates by promoting underlying inflation. Whirlpool's Q3 investor call signaled that the company expects consumer sentiment to improve after the election, irrespective of the outcome. I think that is possible, particularly considering sentiment has been shallow among Republican voters. That said, Whirlpool's most important driver is home sales, pinned down by affordability. Further, although overall US economic trends are decent, specific segments like manufacturing have been weak, indicating recent economic trends are negative for many people. However, given the unemployment rate has been stagnant, though elevated, in recent months, it is difficult to firmly say where the economy and labor market are headed broadly. I would not bet on a US economic rebound quickly lifting Whirlpool's sales. Further, based on Whirlpool's volatile performance over the tariff period, it is difficult to say whether they'd positively or negatively impact its income and sales. In my view, such policies may weaken its sales in the short term and exacerbate its financial woes but potentially strengthen its long-term position. Like many US manufacturing companies, Whirlpool would benefit from a \"renaissance\" in the US manufacturing base. That may require many years of change and may not offset the immediate declines in Whirlpool's stability without direct stimulus. The Bottom Line WHR has a low forward \"P/E\" ratio of 9.1X, while its 2024 EPS target of $11.9 is in line with pre-2020 levels but around half of its pandemic peak. Fortunately, analyst sentiment is no longer declining, with two-year ahead EPS, revenue, and EBITDA estimates stabilizing this year. See below: Data by YCharts Currently, analysts expect WHR's EPS to bottom out in 2025 and rebound above $14 in 2026, potentially rising to $19 by 2028. Its revenue is anticipated to follow a similar trend, but not with as significant an improvement from 2025 to 2028, implying its income will recover due to margin recovery stemming from non-core divestments and efficiency improvements. I believe there is a fair amount of risk in WHR today. Short interest on the stock is higher at 9.2%. That said, it mildly beat expectations in Q3 and improved its full-year outlook. Though I continue to believe some analysts and investors may be overestimating a demand recovery, given the state of home sales, I think Whirlpool should survive its current strains. Further, as long as it survives, it has the potential to recover with greater efficiency and focus and could benefit from a more supportive manufacturing and regulatory environment. Though I am speculating, I also believe that continued job cuts would be a major political failure for the Trump administration, given he has historically focused on the economy. Ultimately, politicians have limited short-term power over corporate success, but I still feel this change is a net positive for the company and may give it some risk protection. Based on the data, US manufacturing is in a very poor position today, failing to recover post-pandemic. As such, I cautiously expect that changing that trend will be a priority for the new administration.  Thus, my view on WHR is mildly bullish, upgrading from my previous outlook. Its prospects seem to be bottoming out while its valuation appropriately accounts for its risks. In the short term, I expect Whirlpool will continue to face pressures. However, looking five to ten years out, I think it is a reasonable investment today.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2482604451"}