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Whirlpool (WHR) Up 8% in 6 Months: Will the Momentum Prevail?

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Whirlpool Corporation WHR currently remains a mixed bag as its cost-containment efforts and margin expansion in North America are poised to drive growth, while high costs and softness in the Latin America and EMEA segments remain concerns. Notably, the company has been taking measures to revive its EMEA segment. Also, it is benefiting from its robust product pipeline and solid innovations.

In the past six months, shares of this Zacks Rank #3 (Hold) company have increased 7.7% outperforming the industry’s growth of 5.5%.

Moreover, the company remains confident to accomplish long-term financial targets. Encouragingly, management reiterated its adjusted earnings per share view for 2019. In fact, the company expects earnings to trend toward the higher end of $14.75-$15.50 mentioned earlier.

This has triggered an upward revision in the Zacks Consensus Estimate. The consensus mark for the fourth quarter and 2019 have moved north by 6 cents and 10 cents, respectively, to $4.33 and $15.35 over the past 30 days.


Factors Driving Whirlpool’s Performance

Whirlpool’s efforts for cost-based price increments and cost-reduction initiatives, focused on improving business efficiency, are reaping benefits. To counter raw material inflation and other cost headwinds, the company implemented global cost-based pricing for trade customers along with initiatives to cut fixed overhead expenses by $150 million. Backed by fixed cost discipline and a favorable product price/mix, it reported operating margin expansion of 100 basis points (bps) in the third quarter. It expects favorable price/mix to aid margin growth throughout 2019.

Despite challenging industry demand in Canada, Whirlpool continued to post positive results for the North America division. Sales for the segment improved 0.5% year over year and 0.6% on a currency-neutral basis, aided by favorable price mix and solid market share gains in a moderate U.S. industry environment. Operating margin in North America expanded 80 bps on favorable product price/mix and continued cost discipline. This marked eighth straight quarter of margin growth for the North America segment.

Looking ahead, the company expects to continue delivering strong results for the region, driven by favorable price/mix and price increase along with improvement in the demand environment in the United States. The company continues to anticipate operating margin of 12% or more for the region.

With regard to its soft EMEA segment, Whirlpool has been undertaking restructuring actions to revive the business. In fact, it remains encouraged about executing proper actions to restore sales volume and enhance operational footprint in the region. Although management revised the division’s EBIT guidance for 2019 to be at the low-end of the previous range, this stems from additional restructuring efforts to improve the EMEA business. Encouragingly, it expects roughly 5% volume growth in EMEA in 2019. Also, the EMEA margins are anticipated to improve during the second half, owing to cost-reduction efforts. We expect the company’s EMEA unit to return to growth based on the aforesaid restructuring actions.

Possible Deterrents

Whirlpool has been witnessing softness across its Latin America segment primarily due to weak industry demand in Mexico. In third-quarter 2019, the segment’s sales fell 27.9% year over year along with operating income decline of 52.5%. Moreover, operating margin contracted 240 bps, as favorable product price/mix and lower raw material cost inflation were more than offset by adverse currency and lower unit volume.

In fact, unit volume was hurt by temporary trade inventory adjustments at a major Brazil-based retailer, which is likely to revive in the next quarter. Nevertheless, it revised industry demand expectations to 3-4% for Latin America, owing to a weaker-than-expected demand environment in Mexico. Moreover, the company projects adjusted EBIT for Latin America to be roughly 6% for 2019, after taking into consideration the impact of aforesaid trade inventory actions and sluggish demand in Mexico.

Also, soft China operations remained a deterrent to EBIT growth. Higher spending toward the transition of Sanyo branded products to Whirlpool brand in China pressurized margins in the third quarter. Consequently, the segment reported an operating profit of $9 million, down 30.8% from the year-ago period.

Operating margin also contracted 140 bps in the reported quarter, as gains from rise in volume, lower raw material inflation and cost-reduction efforts were more than offset by higher brand transition investments in China. Although management reaffirmed margin guidance for Asia at 3% for 2019, higher spending toward brand transition in China might continue to pressurize margins and hurt profitability.

Nevertheless, we expect all aforementioned growth drivers to offset these hurdles and help Whirlpool to sustain its solid momentum.

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