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Household Appliances Industry's Near-Term Outlook Lacks Spark

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The Household Appliances industry comprises companies that manufacture and market home appliances and other related products. Household or domestic appliances include electrical and mechanical devices that facilitate chores like cooking, cleaning, laundry or food preservation.

Companies in this industry make refrigerators, washing machines, water coolers and heaters, microwave ovens, toasters and coffee makers, among other devices. These companies sell products through a network of mass merchandisers, retailers, distributors, dealers, and other builders and outlets. In an era of automation, players in the industry are committed to constant technological enhancements to offer smart home appliances, for instance, voice-activated and hands-free devices.

Let’s take a look at the industry’s three major themes:
 

  • Although regular technological upgrade is a major survival strategy in the industry, higher spending on technology and innovation has been eating into companies’ margins and profits. Freight cost inflation is an added concern. Prices for raw materials like steel and aluminum, which form the base metals for these companies, remain volatile. Also, volatility of oil, plastic or other secondary raw material prices is a concern. These expenses have been bumping up operational costs year over year, eroding companies’ profits.
     
  • Economic uncertainties and trade disruptions on the domestic and international fronts are deterrents to growth. The global coronavirus menace has dented demand and supply across all industries and continents. This novel virus has infected more than 85,000 people across Asia and Europe. With most household appliances producers having operations in the continents, the impact of the outbreak is likely to get reflected in the near-term results. Further, China is a large exporter of steel, which is used as a raw material in the home appliances industry, which might lead to further disruptions in production. Recently, Sweden-based home appliances manufacturer Electrolux (ELUXY - Free Report) warned that the virus will affect its sourcing of products and components from the country. Additionally, adverse currency translations are a major threat to these companies’ top and bottom lines.
     
  • Increased technological advancements, rapid urbanization, rise in income, improved living standards, change in consumer lifestyle and surge in need for household comfort are key factors driving the industry. Demand for fast-accessible and remotely-monitored home appliances has been consistently rising, thanks to tech-savvy consumers. This compels industry players to invest in innovation and R&D to come up with differentiated and handy products. These companies are also committed toward manufacturing appliances that are a one-stop solution for major household tasks. Additionally, appliance makers are installing smart grids, thermostats, digital inverter compressors and other monitoring sensors to make devices more energy-efficient. As a result, household appliances are becoming more high-tech, embedded with smart sensors and IoT-enabled technology. Such rampant innovation can significantly boost companies’ top lines. Meanwhile, the industry players are resorting to pricing actions and cost-productivity programs to boost margins and profitability.


Zacks Industry Rank Indicates Gloomy Prospects

The Household Appliances industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #185, which places it at the bottom 27% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has gone down 2.8%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry vs. Broader Market

The Zacks Household Appliances industry has underperformed the broader Consumer Discretionary sector and the S&P 500 index over the past year.

Stocks in this industry have collectively declined 11.4% against the S&P 500 composite’s growth of 4.9% over a year’s time. Meanwhile, the Zacks Consumer Discretionary sector has seen a decline of 2%.

One-Year Price Performance

Household Appliances Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, a commonly used multiple for valuing Consumer Discretionary stocks, the industry is currently trading at 7.06X compared with the S&P 500’s 16.87X. Further, the sector’s forward-12-month P/E ratio stands at 17.77X.

Over the last five years, the industry has traded as high as 12.89X, as low as 6.37X and at the median of 9.73X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)


Bottom Line

Higher cost of investments in technological advancements and product development is bumping up costs, which is hurting the bottom line. Moreover, volatility in costs like freight and raw material inflation is a constant concern. Furthermore, the spread of coronavirus is wrecking havoc on global trade with supply chain disruptions for raw materials and other products, which should also affect the home appliances industry. Meanwhile, the industry may benefit from continued product innovation and launches coupled with the latest technologies.

None of stocks in the Zacks Household Appliances universe currently sport a Zacks Rank #1 (Strong Buy). But we have one stock with a Zacks Rank #2 (Buy). We also highlight two other stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Whirlpool Corporation (WHR - Free Report) : This Benton Harbor, MI-based home appliances’ leader has lost 6.3% in a year. Further, the Zacks Consensus Estimate for its 2020 earnings per share has been unchanged in the past seven days. It currently carries a Zacks Rank #2.

Price and Consensus: WHR

Haier Electronics Group Co. (HRELY - Free Report) : This Hong Kong-based investment holding company engages in the R&D, production, and sale of washing machines and water heaters under the brand name of Haier, Casarte, and Leader. The company has operations in Mainland China and internationally. The company has gained 9.3% in the past six months. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-year earnings has been steady in the past seven days.

Price: HRELY


Howden Joinery Group Plc (HWDJY - Free Report) : The consensus current-year earnings estimate for this London-based company has been stable in the past 30 days. This Zacks Rank #3 company has advanced 33.9% in the past year.

Price: HWDJY


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