Back to top

Image: Bigstock

Whirlpool's (WHR) Cost-Based Pricing Impresses Amid Cost Woes

Read MoreHide Full Article

Whirlpool Corporation (WHR - Free Report) looks well-placed for growth, owing to strong customer demand and the execution of its cost-based pricing initiatives. It is also poised for growth on stable financials, with no current maturities of long-term debt and enough cash and cash equivalents to meet any obligations.

The company has been witnessing significant revenue growth and margin expansions in North America, Latin America, and Europe, Middle East and Africa regions.

Whirlpool boasts a positive earnings surprise trend. The company delivered an earnings beat for the 12th straight time in second-quarter 2021, while the top line surpassed the Zacks Consensus Estimate for the fifth consecutive quarter. Earnings and sales improved year over year in the second quarter. Earnings growth was backed by robust revenue growth and the execution of its cost-based price increases. It reported double-digit revenue growth, EBIT margin expansion across all regions and substantial cash flow generation, which reflected its strength in a tough environment.

Driven by the above-mentioned factors, shares of Whirlpool have rallied 16.4% in the past year compared with the industry’s growth of 16.2%. The Zacks Rank #3 (Hold) stock has also comfortably outperformed the Consumer Staples sector, which advanced 14.4% in the same period.

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

In the past 30 days, the company’s estimates for 2021 and 2022 earnings per share have been unchanged. For 2021, its earnings estimates are pegged at $26.24 per share, suggesting 41.5% growth from $18.55 reported in the year-ago quarter.

Factors to Aid Momentum

Whirlpool has been on track with actions to protect margins and productivity. It has implemented cost takeout actions, including the curtailing of structural and discretionary costs, capturing raw material deflation opportunities, effectively managing working capital, and syncing supply chain and labor levels with demand.

It recently announced significant cost-based price increases of 5% to 12% in various countries across the globe. It reorganized the supply-chain model to constrained-driven logic that constantly adjusts production based on component availability.

Backed by the actions, adjusted operating profit (“EBIT”) of $607 million in the second quarter of 2021 improved significantly from $204 million in the year-ago quarter. Adjusted operating margin expanded 640 basis points to 11.4%, with all regions registering meaningful margin expansions. This marked the company’s fourth successive quarter of double-digit margin growth.

The price mix improved 600 bps, owing to lower promotions and the aforesaid gains from cost-based pricing. The EBIT margin also reflected 550-bps improvement from net costs related to a carry-over impact of structural cost takeout actions, higher volumes and cost productivity initiatives. The company expects the positive margin momentum to continue throughout 2021, aiding the results.

Whirlpool raised its 2021 outlook. The company expects strength in its business due to robust consumer demand and gains from cost-based pricing actions. It now envisions net sales (excluding currency impact) growth of 16% for 2021 compared with 13% growth mentioned earlier. GAAP earnings per share are now forecast to be $26.95 compared with $23.10-$24.10 mentioned earlier. It also raised the adjusted earnings per share outlook to $26.00 versus $22.50-$23.50 mentioned previously.

For 2021, the EBIT margin is likely to be 10.5%, with 600 bps of margin expansion, driven by price and mix as well as gains from cost-based pricing actions. Management expects net costs takeout to aid margins by 175 bps in 2021, as the company realizes the carry-over benefits of its ongoing cost initiative and solid revenues.

Headwinds to Linger

Whirlpool’s operating performance is significantly dependent on the price of raw materials, particularly steel, oil, plastic resins, aluminum, copper, zinc and nickel. Volatility in commodity prices has been adversely impacting the company’s operating performance. Notably, raw material inflation, particularly led by higher steel and resin cost, weighed on EBIT margin in second-quarter 2021. Rising inflationary pressures in steel and resins hurt the EBIT margin by 400 bps.

It anticipates the global raw material cost inflation, particularly in steel and resins, to hurt its business by $1 billion in 2021. It also expects raw material cost inflations to peak in the third quarter of 2021.

While Whirlpool’s heavy investment in innovative products and technology is likely to buoy its prospects, it is expected to strain the near-term financials. Accelerated investments in marketing and technology, and continued currency devaluation in Latin America impacted margins by 100 bps in the second quarter. For 2021, the company expects increased investment in marketing and technology to hurt margins by 125 bps.

Better-Ranked Stocks to Watch

Columbia Sportswear Company (COLM - Free Report) has a long-term earnings growth rate of 33.5%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GIII Apparel Group, LTD. (GIII - Free Report) , with a Zacks Rank #1 at present, has a long-term earnings growth rate of 11.6%.

Hanesbrands Inc. (HBI - Free Report) , also a Zacks Rank #1 stock, has a long-term earnings growth rate of 8.5%.