At the beginning of the year, I published a subsequent bearish outlook on Whirlpool Corporation (NYSE:WHR). At the time, I suspected 2024 would be a “make or break” year for the company as it faces the confluence of poor cyclical macroeconomic conditions on top of its long-term challenges. Since then, WHR has declined by an additional ~11% and had been down by ~25% before its recent spike in acquisition rumors.
With that in mind, it is an opportune time to analyze the potential of a Whirlpool takeover and provide an updated outlook regarding its exposure to changing economic circumstances. Chiefly, the potential decline in interest rates has created a direct headwind to its sales, as has a significant decrease in home sales, which drive much of Whirlpool’s revenue. Of course, we must also consider the company’s long-term issues, such as rising production costs that may be competitively problematic and exacerbate its economic exposure.
Whirlpool’s Income Outlook Declining
At this point, investors should consider the risk of a dividend cut. It is unlikely that Whirlpool will cut its dividend soon, as its cash flow and income remain above its dividend. However, the current trend points in that direction by perhaps 2025 due to its relatively poor liquidity, seen in its negative working capital. See below:
Current income expectations point to an EPS of $11.55 this year, rising to $14.8 over the next two years. Two years ago, its EPS expectation for this year was ~$27, so these estimates are liable to change and decline. If the company’s macroeconomic and secular landscape continues to deteriorate, it could see its income fall below its dividend level, perhaps by next year. Thus, a 2024 turnaround is a driving factor for its dividend’s stability, particularly given its low non-inventory current assets compared to its current liabilities.
The risk to its dividend is higher if we consider its leverage and high capital expenditure spending. On a TTM basis, it has had a significant ~$10.18 in CapEx per share, consuming most of its net income. Further, its debt-to-operating income and interest-to-operating income are both very high, signaling a high risk of its BBB credit rating falling into junk territory. See below:
I’m using operating income, as its EBIT metrics have been highly skewed to the downside over the past two years due to one-off charges from EMEA divestments. Based on both metrics, we can see a clear trend of higher debt borrowing at higher rates, further confounded by lower net income and, to a degree, higher capital expenses.
From a dividend standpoint, we must consider its high capital expenditures. Realistically, much of that is an ongoing cost that the company cannot avoid if it wishes to remain competitive. However, from income, Whirlpool would likely need to slash its dividend before cutting capital expenditures. Its operational cash flow is steadily falling while its cash from financing is rising, indicating its debt is increasing proportionally to its dividend (and former share buybacks). See below:
TTM, the company’s cash from financing was negative, indicating the combination of dividends and buybacks was just above its debt growth. Still, that figure is trending in an adverse direction. It should continue to do so as long as its operating cash flow is not sufficiently high to offset capital spending (primarily cash from investing).
Although some may argue that its dividend is safe due to its payout ratio, I believe that may not remain true if its income fails to recover soon. With low liquidity and ongoing refinancing and debt reduction needs, I feel its dividend will be cut next year if macroeconomic conditions worsen.
Lower Interest Rates Will Not Save Whirlpool
Realistically, the above cash-flow-related issues are surmountable if the economy remains stable or strengthens. The current EPS consensus for WHR points toward a bottoming out this year, followed by a slow recovery over the rest of the decade, bringing its EPS back to $20 by 2030. Thus, from a long-term perspective, WHR’s forward “P/E” may be as low as 5X, which is undoubtedly low and points toward a potential value opportunity at its current price.
That said, should economic conditions remain weak or decline further, I expect cash-flow issues will be adverse to its equity through either higher interest rates on refinanced debt, equity raises, or dividend reductions, not to mention the ongoing permanent declines to its core business through divestments.
As detailed in my previous research, I tend toward the view that Whirlpool’s focus on manufacturing in rising-cost areas that are not necessarily supportive of factory development should continue to push its costs higher at a rate faster than inflation. This includes metals, energy (and transport), and labor, all of which have tended to rise faster than inflation in recent years, making it difficult for WHR to pass costs forward and pushing its gross margins lower.
The primary counterargument to this long-term outlook is that inflation is falling in the short term. As the economy slows, we see the blue-collar labor shortage calm, commodity prices stagnate, and a potentially rapid decline in short-term interest rates. These factors should support Whirlpool’s business, but that does not mean they will offset the economic backdrop. For example, if interest rates are falling because the US consumer and manufacturing economy is turning lower.
The recent GDP report was surprisingly firm despite ~60% of Americans believing we’re in a recession. Though this lowers rate cut odds, it may be argued that GDP growth was high due to business inventory growth, which is not necessarily a good sign. Further, GDP growth was aided by higher personal consumption spending. It is often argued that rising consumption and lower savings result from higher consumer prices for items not accounted for in the CPI, potentially skewing the GDP figure.
One of the most outstanding indications of lower economic strength is the collapse of appliance unit sales, as indirectly measured by total shipments in USD divided by the appliance PPI:
Appliance prices are rising and are compounded by higher borrowing costs for those consumers requiring financing options. Further, higher interest rates, excess consumer debt in younger adults, and high home prices have caused pending home sales to collapse to record-low levels. Serious loan delinquencies are rising quickly for all adults but are very high for those under forty as that age group usually has very low median savings.
The fact is that Whirlpool’s North American revenue (by far its largest) is driven by home ownership. Modern appliances last 10-20 years, less than they used to, but have superior efficiency. There may be fewer replacement purchases today, since there was a significant increase in appliance sales from 2015 to 2021. In my view, appliance sales were abnormally high in the 2000s due to the boom in single-family residential development and “efficiency upgrade” purchases. I imagine fewer people are buying appliances for voluntary reasons today.
Although rising unemployment may trigger rate cuts, rising unemployment should harm consumer durable discretionary spending much more. Further, rate cuts have no direct impact on 30-year mortgage rates, since the Fed only handles the immediate discount rate. Theoretically, a return to QE and mortgage purchases could lower mortgage rates, as seen in 2020. Still, the Fed is currently not close to contemplating that and may not due to the widespread inflationary issues created partly by doubling the monetary base in 2020. Thus, unless home prices collapse, I see no reason why home sales and affordability should improve. See below:
Overall, I believe that potential recessionary interest rate cuts are a net negative for Whirlpool because the potential positive financing effect is a corollary to potentially severe consumer spending capacity declines and further housing market declines. Yes, a recession should temporarily slow or reverse manufacturing cost growth, but I think the negative demand headwind would be greater. Further, given geopolitical (and other) risks to the global manufacturing supply chain, manufacturing costs may rise abnormally fast in the long run.
The Bottom Line
Compared to January, I believe we’re seeing more evident signs of American consumer deterioration, most notably in rising unemployment, underemployment, and dual/part-time employment (making up virtually all recent “job growth”). We also see continued negative trends in home sales fundamentals and rising consumer credit delinquency. On the positive front, commodity and labor costs are more stable, while short-term rates may decline. However, that results from economic weakness and is likely insufficient to cause improvement.
Given my focus on the economic cycle and the global macroeconomic and geopolitical environment, I believe that Whirlpool’s EPS will continue to decline through 2025-2026, subject to a continued rise in unemployment and credit delinquency. Should those two consumer-stability factors reverse, it may be reasonable to buy WHR because its economic fundamentals will improve, though I feel that is quite unlikely.
I am slightly bearish on WHR because I do not believe its stock price fully accounts for this risk. Still, it is discounted compared to its typical valuation in recent years and, subjectively, compared to its peers. Notably, LG Electronics’ stock price on the Korean exchange is also more stable, potentially pointing toward a competitive edge due to the Korean won’s declining value.
Although I’d avoid WHR and believe it will fall in a recession, I would not bet against it. Short interest on WHR is elevated at ~10%, which may not be wise given that its valuation is only slightly high and may be an acquisition target. German Bosch is weighing buying the company to enter the US market. Although there could be weight to this acquisition rumor, I see it as a “buy the rumor, sell the news” situation, as it now has downside risk if this rumor is called off. Given economic circumstances are poor in North America and Europe, and Whirlpool is divesting from Europe, it would seem as though this acquisition would be a diseconomy of scale. The German company now wants to buy Johnson Controls (JCI), indicating this deal is unlikely.
To summarize, WHR is certainly cheap today, but given analysts remain hopeful for a seemingly unlikely immediate economic turnaround, I think it will likely disappoint. Further, in the event the economy worsens, I think a dividend cut may occur due to its liquidity and cash-flow circumstances. Indeed, I could become bullish on WHR after it cuts its dividend, as that may drive its valuation lower, while a dividend cut seems to be a wise long-term business choice to deleverage its balance sheet more quickly.