Whirlpool Washes Wall Street (WHR)

Whirlpool has stomped earnings expectations for the last five quarters. This company has continued to rake in the profits in 2007, despite the U.S. housing crunch and material price inflation.  With the last earnings announcement coming in 10.7% higher than estimates, I think it is safe to say that Whirlpool has figured out how to weather the bear and continue to shoot for the bull…

Impressive Numbers

It’s hard to argue with any of Whirlpool’s numbers.  In the fourth quarter of 2007, operating profits jumped 74 percent to $332 million compared to the same quarter in 2006.  The full year earnings in 2007 were $8.10 per share – a 28 percent increase from the $6.35 per share in 2006.

A significant catalyst in the amazing profit and earnings spike in 2007 was the successful acquisition of Maytag, which Whirlpool bought in 2006.  It’s absolutely amazing that Whirlpool was able to see such growth amid increased oil prices, inflated materials prices, and a stagnant U.S. housing market.  So how exactly did Whirlpool keep growth alive in 2007?

It’s All About the International…

Whirlpool Europe, Latin America and Asia all reported astounding fourth quarter and full year revenues in 2007 – Whirlpool Europe saw a 22 percent increase in operation profits, Latin America saw a 73 percent increasing in operating profits, and Whirlpool Asia’s fourth quarters sales spiked 26 percent from the same quarter last year.

Whirlpool anticipated that the housing market was on the downturn and decided to focus efforts overseas during the last couple years.  It’s really quite brilliant actually – when Whirlpool realized the top in the American housing market, it went out and bought one of its largest competitors – Maytag – and combined forces in order to make a significant stab at the foreign markets.

Giving Back to Share Holders

In the fourth quarter 2007, Whirlpool repurchased $117 million shares of common stock – increasing its yearly total to $368 million. These shares worked heavily toward completing the $500 million repurchase plan established in 2006 – Whirlpool only needs to buy another $97 million worth of common stock to complete the project.

The company also produced $521 million in free cash flow in 2007, which it used to reduce total outstanding debt from $2.3 billion to $2.1 billion.  The company also announced a 43-cent per share quarter dividend – which comes to a yield of almost 2%.

It’s clear that Whirlpool is making money.  With the $500 million share repurchase program almost complete, the reduction in corporate debt and a solid dividend payout – Whirlpool is on the growth fast track and is quickly sweetening shareholders positions.  This will continue to attract new investors and ultimately raise the share price.

The Bottom Line

With earnings on the rise, revenues from foreign operations spiking and the share repurchase program approaching completion – Whirlpool’s shares are going nowhere but up.  With a current P/E ratio of 11, Whirlpool is significantly undervalued compared to the Industry average of 15 and the S&P 500 P/E ratio of 21.

A fair valuation is more along the lines of $120 per share, with respect to the industry average.  We’re looking at a current share discount of $30 – this is a true diamond in the rough – a strong 6-month buy. (I just increased the price figure in the calculation of the P/E ratio until I reached the Industry average of 15).

Cheers,

Jack Aubrey
Senior Equity Analyst, Bourbon & Bayonets