7/20/2010
By Brian Sozzi, Research Analyst

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The theme this earnings season has already begun to show its ugly head; revenue is softer than market expectations but companies are still managing their businesses as if they are going under...hence leading to earnings upside.  One company that solidly beat consensus earnings for the second quarter is Whirlpool (WHR).  The global appliance maker trounced consensus revenue estimates by a slick $500 million on continued favorable currency translation and unit shipment growth.  Amen, brother.  The market's response, you ask?  Shares of Whirlpool are getting put out to dry in today's session as the top line beat is simply not enough.  Investors, apparently, do not believe the company's outlook is achievable or in other words, revenue gains in 2Q10 are unsustainable.  Management all but called this out on the conference call, which led to swift sell-off in the stock as the comments came rolling off the tongue of CEO Jeff Fettig.

Is it all doom and gloom?

Quarterly Snapshot

Figures all but jumped off the page: Whirlpool announced net sales of $4.53 billion, +8.8% year over year, or +6.0% excluding the benefit of currency translation.  The star of the quarter was Mr. Gross Margin, which came in at 16.78% compared to the 14.50% consensus forecast (I modeled for 15.00%).  Productivity measures and increased utilization at Whirlpool manufacturing facilities to satisfy demand offset higher raw material prices and price/mix that continues to be unfavorable (I believe it's a combination of Whirlpool giving concessions to home centers/mass merchants to move volume and consumers scaling back on over the top appliance purchases).  Elsewhere, Whirlpool appears to have managed rather well, continuing to control operating expenses and improving operating cash generating levers.  All business segments notched year over year operating profit growth, through I am cautious as to the amount of tax credit monetization (plus $50 million) that impacted Latin America, where operating profit rose 120% year over year.  Prior to 2Q10, Whirlpool had $645.0 million in BEFIEX tax credits remaining.

Solid outlook sends mixed signals: Guidance was raised to $9.00 to $9.50 per share from $8.00 to $8.50 per share (consensus: $8.67 per share), in spite of unit shipment totals for Latin America, Asia, and Europe being held consistent to the comments expressed on the 1Q10 call.  I had my trust spreadsheet model at FY10 EPS of $9.17.  My inclination is to appreciate the strong quarter from Whirlpool, especially in light of a string of softer than expected economic data on a global scale.  That said, I am becoming mindful of the company's tougher profit growth comparisons in 2H10 and a demand picture in Europe that may weaken further from simply bumping along the bottom as it has to start 2010.

Areas of Concern

* Revenue growth was slower sequentially in all segments.
* Operating profit gains are slowing (bounced hard in 1Q09 as some of the company's productivity initiatives kicked in).
* Company did not raise unit shipment outlooks for Europe, Asia, or Latin America; they took their outlook to 5% growth in North America from 3% to 5%.
* U.S. unit shipments underperformed the market (component shortages were blamed).
* Guidance was raised by $1.00 to $1.50 from previous range, and at $9.00 to $9.50, was well ahead of the $9.67 consensus.  However, using the adjusted EPS number for 2Q10, which would suggest a beat to consensus of $0.69 instead of the $0.51 being reported, the raise could be viewed as a slight disappointment when matched up to the maintained outlooks for unit shipments internationally.

Dog or Worthwhile Opportunity?

I am still a believer in the Whirlpool investment thesis, and see fair value to $120.00 per share(down from $145.00 per share previously).  The main consideration in my price target adjustment is a lower assumed P/E multiple, one that is below the nine-year annual high (14.8x), as Whirlpool's growth moderates in FY11 relative to FY10.  I actually increased my EPS estimate for FY11 to $9.25 from $8.91, owing to likely continued productivity improvement benefits, stronger price/mix (economic backdrop and comparison related), and greater monetization of BEFIEX tax credits in Latin America (richer product mix is the cause) than my prior forecast.  However, the fact is that FY11 is shaping up to be a down earnings year for Whirlpool as appliance rebate programs will have run their course, another housing tax credit is likely off the table, the law of large numbers drives slower growth rates in Latin America and Asia, and a higher tax rate is recorded.  Europe is the true wildcard; does demand bounce along the bottom as we have seen from Whirlpool for two consecutive quarters or does it fall through a trapdoor as the lag impact of recent economic troubles catches up to the financial statements?  On my end, I have modeled for slightly lower FY11 shipments in Europe.

2H10 will bring slower top and bottom line growth to Whirlpool and accordingly, the magnitude of EPS upside should subside (especially as analyst estimates move higher following 2Q10 results).  i do not rule out a further adjustment period for the stock (aka re-pricing) as investors price in a decelerating growth story; ultimately I expect this revaluation period will be short in duration as Whirlpool still has an enviable market share position globally, a strong FCF outlook, and a lean operating platform all of which makes the stock quite enticing at a mere 9.6x my revised FY11 EPS estimate currently.

Brian Sozzi
Wall Street Strategies