2/2/2010
By Brian Sozzi, Research Analyst

This morning, Whirlpool (WHR) announced its 4Q09 and FY09 financial results to a market that has consistently poured cold water on better than expected earnings and guidance this season.  However, we had confidence in our analysis prior to the release, which was supported not only by a firm undervalued line of reasoning, but strengthening global industrial production trends, mostly encouraging U.S. housing data, and indications that Whirlpool was ramping up production to support international growth.  Initially, the stock was bid lower in the pre-market, despite the numerous positives in the report and guidance that far from implies doom and gloom on a global scale.  Since the report was released at 6 am, however, the stock has fought back due in our view to the solid nature of the results.

Now, there are a few red flags worth noting, so let's get them cleared from the deck to start. 

* The company's share gains in the U.S., Latin America, and Asia may be coming at the expense of price.  If this is the case, unit shipment guidance for 2010 in Latin America and Asia (+5% to 10% and +3% to 5%, respectively) could suggest pressured sales, and potentially, margins.
* Organic sales in Europe declined (headline increase, aided by currency, were +2%)
* Operating cash flow guidance for 2010 was below the amount of cash generated in 2009.  The company appears to be positioning itself for an increase in inventory (inventory was down 16% at year end) to meet the demand it's experiencing.  But, the question arises that with China (27% of annual profits) pulling back on its easy lending policies and the recently soft U.S. housing data, coupled with a possibility of a double-dip in the U.S. economy, there may be concern in the market that Whirlpool will be left holding unproductive inventory that will require discounts.
* How much inflation has management built into its FY10 earnings outlook?  Input deflation was a major tailwind to FY09 results.

Onto the positive items, which we believe will win out at the end of the day.  Whirlpool reported net sales of $4.9 billion (consensus: $4.2 billion) and EPS of $1.64 ex. items (consensus: $1.32).  We were the high estimate on the Street, modeling for P/S earnings of $1.44.  The company guided to FY10 EPS of $6.50-$7.00 (consensus: $6.45); we were at P/S earnings of $6.47.  Encouraging items included:

* First total y/y sales increase since 3Q08; the strongest quarterly percentage gain since 1Q07.
* Gross margin expanded meaningfully, and beat consensus (14.14% versus 13.80%).
* Sales growth returned to the U.S. and Europe.
* Latin America and Asia grew sales by rates of 52% and 34%, respectively.
* Profit trends by segments generally a good story.

We undoubtedly will receive greater color on the results during the conference call.  We are particularly curious as to the impact of tax credit monetization on the Latin American segment following the tax holiday in 3Q09 that somewhat led to muted segment results.  But, overall, we believe a strong case could be made the stock remains attractively valued in light of what's likely to be hiked FY10 EPS estimates and solid demand trends at least into the third quarter.