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Whirlpool Rides on Solid North America Unit, Cost Woes Stay

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Shares of Whirlpool Corporation WHR have increased 21.3% in the past year, outperforming the industry’s growth of 19.3%. Notably, the company is benefiting from cost-containment efforts and margin expansion in North America. Also, its robust product pipeline and solid innovation bode well for growth. Moreover, this Zacks Rank #3 (Hold) company is undertaking taking measures to revive its soft EMEA segment.

However, high costs and softness in Latin America and EMEA segments remain concerns. Let’s look at both sides of the story.

Factors Driving Whirlpool’s Performance

Whirlpool’s 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 in the quarters ahead.

Despite challenging industry demand in Canada, Whirlpool’s North America division continued to perform well. Segment sales increased 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 the eighth straight quarter of margin growth for the North America segment.

Looking ahead, the company expects the region’s results to be solid, 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, this stems from additional restructuring efforts to improve the EMEA business. It expects EBIT to be at the low-end of the previous range. We expect the company’s EMEA unit to return to growth based on the aforesaid restructuring actions.

Hurdles in the Path

Whirlpool has been witnessing softness across its Latin America segment primarily due to weak industry demand in Mexico. In third-quarter 2019, segment 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 soft due to the impact of the aforesaid trade inventory actions and sluggish demand in Mexico.

Apart from these, soft China operations remained a deterrent to EBIT growth. Higher spending for the transition of Sanyo branded products to Whirlpool brand in China put pressure on margins in the third quarter. Consequently, the segment reported 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 the rise in volume, lower raw material inflation and cost-reduction efforts were more than offset by higher brand transition investments in China.

We expect the aforementioned factors to offset these hurdles and help the stock sustain the momentum.

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