A Knee-Jerk Reaction Is An Opportunity In Whirlpool
Whirlpool’s (NYSE: WHR) Q3 earnings report was a little bit less than expected but, ultimately, the company's business is still very strong. More importantly, cash flow and free cash flow generation are reaching record levels and driving share repurchases, and sustaining a strong dividend yield. While the impacts of COVID-19 are both a boon and a bane for the company, growth remains in the forecast if at a subdued pace to what it could be without the global supply chain issues. The takeaway here is that the Q3 revenue miss is, in our opinion, a knee-jerk reaction to earnings news that is opening up a buying opportunity in a high-quality dividend stock that we like.
Whirlpool Has A Good Problem, But It's A Problem
Whirlpool had a good quarter with growth on both a year-over-year and two-year basis. The bad news is that the $5.49 billion in consolidated revenue missed the Marketbeat.com consensus estimate by 400 basis points. The reason is because of supply chain disruptions and supply shortages that are not expected to abate in the current quarter, that’s bad news. On the flip side, Revenue growth of 3.8% YoY and 7.8% versus two years ago is still good if supported by pricing increases.
The good news is that demand remains strong across end markets and backlogs are growing. On a segment basis, Latin America lead with growth of 17% and was followed up by a 5% gain in North America. Sales in the Emerging Markets shrank a slim 0.2% while revenue in Asia fell a more robust 21%. Sales in Asia were impacted by the divestiture of foreign business so don't read too much into that number.
Moving down the report, the company reports a 120 basis point contraction in EBIT margin but far less than what was expected. Pricing increases and mix were able to offset most but not all the higher costs but we are expecting additional price increases to make up the difference in future quarters. As for earnings, the company's GAAP earnings of $7.52 beat the consensus by $1.74 on margin strength while the adjusted EPS of $6.68 beat the consensus by $0.53.
Looking forward, the company increased its expectations for revenue in 2021 but there is a caveat. While revenue is expected at a higher rate than previously, the new guidance for adjusted earnings is slightly less than the current consensus estimate for $26.35so not as good of news as it could be.
Whirlpool Puts Free Cash Flow To Good Use
Whirlpool’s cash flow improved more than 1000 basis points to over $1 billion on a year-to-date basis due to revenue leverage and the resumption of operating shut down during the pandemic. This cash flow is being put to good use shoring up the balance sheet and returning capital to shareholders. The company is sustaining a 2.7% dividend yield and we have a positive outlook for dividend growth. The company has been raising the dividend for 11 years at a 7% CAGR and it's only been paying out 22% of its consensus earnings so there is plenty of cash flow to use. Along with that are share repurchases that we expect to continue in the current quarter. The company repurchased $441 million shares during the last quarter or about 3.35% of the market cap. As for the balance sheet, the company has a little bit of debt but is well capitalized, has ample amounts of cash, and has fortress-quality leverage and coverage ratios. We're not worried about the dividend.
The Technical Outlook: Whirlpool Slips To Support
Shares of Whirlpool or down a little bit more than 2% and the pre-market action but are already showing signs of support. Price action is moving up from the $200 level which has acted as previous support many times in the past. It is our view that Whirlpool is bottoming after a correction that began in the early summer of 2020. At this time, the stock is trading at roughly 8x its Marketbeat.com earnings consensus and is a deep value. Add in the safe and growing dividend yield and we see a high likelihood for price action to move higher. While the stock may remain range-bound in the long-term, the top of the range is near $255 and roughly 25% upside from current price action.
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