Whirlpool (WHR): Buy, Sell, or Hold Post Q3 Earnings?

Over the last six months, Whirlpool’s shares have sunk to $86.20, producing a disappointing 6.5% loss - a stark contrast to the S&P 500’s 10% gain. This might have investors contemplating their next move.

Is there a buying opportunity in Whirlpool, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Whirlpool Will Underperform?

Even with the cheaper entry price, we're cautious about Whirlpool. Here are three reasons you should be careful with WHR and a stock we'd rather own.

1. Weak Sales Volumes Indicate Waning Demand

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Electrical Systems company because there’s a ceiling to what customers will pay.

Over the last two years, Whirlpool’s units sold averaged 6.5% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Whirlpool’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Whirlpool’s $8.28 billion of debt exceeds the $934 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $1.17 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Whirlpool could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Whirlpool can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Whirlpool, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 13.8× forward P/E (or $86.20 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.

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