Can Whirlpool’s Stock Rally Continue Post-Covid?
Whirlpool’s stock (NYSE: WHR) grew 40% year-t0-date to around $200 levels, and largely outperformed the S&P index which moved 9% YTD. The company was able to beat market expectations on revenue and earnings in both quarters so far this year. Despite this increase, we believe that Whirlpool’s stock is poised to decline going forward. This is taking into account Whirlpool’s revenues which saw a 16% year-over-year decline in the fiscal first half. In addition, the home appliance manufacturer’s compounded annual revenue growth also declined by 2% prior to the pandemic (during the 2017-2019 period). All of these elements lean toward an inconsistent organic revenue decline that could continue post-Covid, resulting in a possible downturn in the company’s stock price. Our dashboard, ‘What Factors Drove 30% Change In Whirlpool Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.
Whirlpool’s stock declined 6% over the last 2 years – justified by a slump in revenue from $21.3 billion in 2017 to $20.4 billion in 2019. This was largely due to the divestiture of the Embraco compressor business, unfavorable foreign currency, and unit volume decline. It should be noted that the company’s shares outstanding decreased by 13% during this period, which led the revenue per share metric to grow 11%.
Finally, Whirlpool’s P/S multiple declined slightly from around 0.5x in 2017 to around 0.45x in 2019. While the company’s P/S is now 0.6x, there is a downside risk when the current P/S is compared to levels seen in the past years.
So what’s the likely trigger and timing for the further downside?
The Covid-19 pandemic reduced Whirlpool’s revenue and earnings, but the negative impact was partially mitigated by significant cost reductions. All-in-all, the company’s net sales were down 12.5% year-over-year (y-o-y) for the North America region (which held up reasonably well), compared to drops of 19% in Europe, Africa, and the Middle East; 37% in Asia; and 51% in Latin America. For 2020, Whirlpool’s management expects net sales to fall 10% to 15%.
Whirlpool’s sales product mix shifted in the direction of large appliances, due to selling more freezers, microwaves, lower-end refrigerators, washers, and dryers. But this pandemic buying boost could only be short-lived. Furthermore, due to the pandemic there is a rise in unemployment and lower consumer sentiment, and it can have a potential adverse impact on holiday sales.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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