Whirlpool Was Undervalued, Now Not So Much

Think back to last March if you dare, the equity market had collapsed thanks to a housing bubble and credit crunch.  The housing market which started the whole mess in America was still weak despite unprecedented government stimulus.  Consumers buckled beneath underwater mortgages and foreclosure rates and unemployment rates seemed to accelerate month by month.  As we are all aware, the economy was in bad shape but it is darkest right before the dawn.  At that point, a company heavily reliant on the US housing market and consumer spending–a company like Whirlpool (WHR)–was likely extremely Undervalued.

Perhaps it was just luck, but we pointed out our view that Whirlpool was due for a rebound on March 11, 2009 (Whirlpool: More than Just Trading Water) and since that time the stock has more than quadrupled.  The company was still generating decent cash flow, cutting costs and paying out a nearly 7% dividend yield.  In hindsight, it is clear that company had fallen out of favor with the market, and it was being treated like it would never reclaim its former standing.

The reason for this trip down memory lane is that Whirlpool’s CEO Jeff Fettig recently stated in an interview that he continues to believe his company is undervalued.  Now, it is not uncommon for a CEO to believe better times are ahead for their company’s stock; after all a CEO’s primary purpose is to create value for shareholders.  However, with all due respect our methodology disagrees with Mr. Fettig as we have recently downgraded WHR to Overvalued from Fairly Valued.

From our perspective, the stock is currently trading near what we have termed the rationally expected high price based on historical valuations of WHR.  For example, over the past ten years the market has been willing to pay between 8.4x and 16.4x times cash earnings per share.  The current price-to-cash earnings multiple is neither particularly high or particularly low based on fiscal 2010 estimates (predicting full year profits double) at 12.1x.  However, on a price-to-sales basis the stock currently sits at .43x, which is above the historically normal range of .21x to .41x.  Furthermore, that nearly 7% dividend yield when we last wrote about Whirlpool has come down to 1.6% as the stock has appreciated.  Clearly, hindsight is 20/20 but value investors can probably see that this ship has likely sailed.

To be fair, Fettig was referring to rumors of potential private equity interest in WHR and that can be a much different idea of “undervalued” than a typical value investor looks for.  Private equity may be licking their chops for Whirlpools growth potential in thus far underserved emerging markets like Brazil and India.  Each market is burgeoning with growing middle classes eager for wider adoption of washing machines, dish washers and the like.  Fettig could be right and the company may in fact be bought by private equity for a premium price, but as far as value-focused investors are concerned, the buying opportunity has likely passed.  With that said, we do like management’s relentless drive to lower costs and grab emerging market share, so if you already own it would not hurt to hang on for the ride.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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