Shares of Whirlpool Corporation have gained nearly 84% over the last year compared to a return of 37% for the S&P 500. Even after this return, however, shares still trade with an earnings multiple in the low double-digit range. The company is expecting 2021 to be another year of high levels of growth on top of what it saw in 2020.
Though some might be tempted to lock in gains now, I continue to rate the stock a buy and estimate a total return potential of nearly 10% from the current levels.
A look at earning results
Whirlpool last reported earnings results on April 21, delivering excellent numbers on both the top- and bottom-lines. Revenue for the quarter surged nearly 24% to $5.4 billion, beating Wall Street analysts' estimates by more than $410 million. Adjusted earnings per share of $7.20 improved by a staggering $2.86, or 66%, from the prior-year quarter and were $1.80 better than expected.
The Ebit margin expanded 620 basis points to a company record of 12.4% despite 225 basis points of cost inflation. The biggest contributor to improvements in Ebit margin were a combination of higher prices and product mix, but cost controls also aided results. This was Whirlpool's third consecutive quarter of double-digit Ebit margin and demonstrates how strong results were even in the face of higher input costs.
Every region of the company posted double-digit growth. North America, Whirlpool's largest contributor to sales, grew 20%. Gains in this region were driven by sustained consumer demand that led to volume growth and increases in market share. Europe/Middle East/Africa was higher by 33% due to incredibly robust volumes. Revenue for this region experienced its third consecutive double-digit growth rate. Latin America improved 18%, though sales were up 35% when excluding the impact of currency exchange. Brazil and Mexico were the best performing geographies. Revenue from Asia increased 43%, mostly due to market share gains in China.
Whirlpool's balance sheet appears solid. Total assets amounted to $20.3 billion at the end of the quarter, with current assets of $9.8 billion and cash and equivalents of just under $2.5 billion. Inventories of $2.5 billion were up 13% sequentially, but down 3% year-over-year. Total liabilities were $15.2 billion, including current liabilities of $8 billion. While Whirlpool does have total debt of $6.1 billion, just over $300 million matures within the next year.
Guidance
Following first-quarter results, Whirlpool raised its guidance for adjusted earnings per share for the full year to a range of $22.50 to $23.50, up from $19.00 to $20.00 previously. Reaching the midpoint would be a 25% increase from the prior year. Revenue is now expected to grow 13% compared to prior guidance of 6%. The Ebit margin is expected to be closer to 10% than Whirlpool's earlier estimate of 9%.
Dividend and valuation analysis
Investors in Whirlpool have been the beneficiaries of solid dividend growth over the years. The company's dividend had a compound annual growth rate of just under 10% from 2011 to 2020. Whirlpool maintained its quarterly dividend from Q3 2019 through Q4 2020 even as the company dealt with the effects of the Covid-19 pandemic.
That changed when the company announced a 12% dividend increase for the upcoming June 15 payment date, extending Whirlpool's dividend growth streak to 11 years. The stock now yields 2.4%, slightly below the 10-year average yield of 2.6% but nearly a full percentage point above the average yield of the S&P 500 index.
Whirlpool's annualized dividend of $5.60 and the midpoint of earnings per share guidance give a projected payout ratio of just 24% for the year. For context, Whirlpool has had an average payout ratio of 27% since 2011, showing that the dividend is been conservatively managed even when the growth rate has been high. The company has a long-term payout ratio target of 25% to 30%, so this year's expected payout ratio is below even the low end of this range.
What about the free cash flow payout ratio? Whirlpool distributed dividends of $79 million in the first-quarter while generating free cash flow of $109 million for a payout ratio of 72%. While this is high, the dividend looks extremely safe using free cash flow over the longer-term as the payout ratio was an average of 41% for 2017 through 2020.
With shares currently priced at $235, Whirlpool has a forward price-earnings ratio of 10.2 using company guidance. The stock has five- and 10-year average price-earnings ratio of 10.3 and 11, respectively. The past few years have seen Whirlpool trade with a lower multiple as earnings growth slowed. Coming out of the last recession, the stock had a low double-digit multiple as growth was considerably higher.
With earnings per share expected to show significant improvement in 2021, I am comfortable with a target multiple of 11 times earnings. Applying this growth rate and assuming the company will meet its own guidance gives a price target of $253. Achieving this price target would result in a 7.7% return from current levels. Factor in the company's dividend and total returns coould reach to 10%.
Takeaways
Whirlpool benefited mightily from the work-at-home transition that took place last year due to the Covid-19 pandemic. Also aiding matters were the several rounds of direct payments to people that the government issued as a way to aid those earning below a certain income threshold. Many consumers used these payments as a way to make improvements to their homes, including in the appliance category. According to Whirlpool, this is one reason why it had a 16% adjusted earnings per share growth in 2020.
Even with this tailwind set to disappear soon, the company still seems optimistic. Using the company's guidance for the year, Whirlpool could see a two-year stacked adjusted earnings per share growth rate of almost 44%.
While no direct stimulus payments are expected to be made going forward, families with children under the age of 18 will begin to see payments of up to $300 per child per month starting in July. It is possible that these funds could be used to make additional purchases.
Like many companies, commodity inflation is going to be a headwind for Whirlpool this year. As stated above, raw materials negatively impacted the Ebit margin by a sizeable amount. Leadership stated on the conference call that material costs will impact the company's business by approximately $1 billion this year. These costs are likely to peak in the third quarter, according to leadership.
This is not a small amount given that the company generated $19 billon of revenue in 2020. Still, Whirlpool has managed to successful pass along costs to consumers as first-quarter results showed that demand was elevated even at higher prices. In addition, the company's cost control initiatives have helped offset inflation headwinds. If this pattern holds, then the higher costs of raw materials will be but a speedbump for the company as it looks to have another year of growth.
Final thoughts
The first quarter was an acceleration of growth from prior quarters as Whirlpool reaped the benefits of consumers putting disposable cash into updating their homes and appliances. Every region that the company operates in had double-digit sales growth and the company successfully handled inflation headwinds very well. And yet shares still trade at about 10 times future earnings estimates.
Whirlpool's most recent dividend raise was higher than normal and the stock has a market-beating yield. Combine the yield with potential returns from the price-earnings ratio reaching its long-term historical average and investors could see another double-digit gain. For these reasons, I continue to view Whirlpool as a buy.
Author disclosure: the author has no position in Whirlpool.
