Whirlpool Corp. (WHR, Financial) released its second-quarter earnings report on Monday, revealing a $140 million revenue target miss.
The company did beat its earnings estimate by 68 cents per share, indicating that many over-anticipated the burden of rising input costs. However, Whirlpool's revenue miss is a worrying sign; is this the start of a cyclical downturn for the company?
A closer look at earnings
The company's net sales decreased 4.3% during the quarter, impacted by supply disruptions and softening demand.
The North America segment is suffering from margin compression as it dipped to 14.1% from 18.3% a year ago. Furthermore, demand in the Europe, Middle East and Africa division dipped 10% year over year with an Ebit margin of 0.2% versus 2.5% last year. Lastly, Whirlpool's Latin America results also declined, with the regional EBIT margin at 7.2% versus last year's 9.7%.
On the upside, Whirlpool returned $400 million to shareholders by means of dividends and share buybacks as part of a $1.5 billion shareholder compensation plan.
Durable goods sales and cyclicality
Durable goods, or household consumer goods, are cyclical in nature. As the economy traverses through its different ups and downs, households adjust their saving and spending, which is illustrated in the industry trends chart below.
Source: Whirlpool
Now relating the information above to the yield curve below paints a clearer picture of where Whirlpool's sales are likely headed.
First, the rising curve suggests that contractionary monetary policy will be applied over the coming years, which could weigh on household balance sheets in the short run. As such, spending on durable goods, and household goods in particular, will probably recede.
Second, the yield curve is inverted. An inverted yield curve often indicates a recession, so if we do, in fact, enter negative economic growth, we will likely see households spend very little on household products.
Insider trading
The last angle to examine is Whirlpool's insider trading. Based on GuruFocus data, internal sell-side trades have dominated insider buy trades.
While not an absolute, typically whenever insider selling dominates insider buying, it is likely that the company's near-term financial results will be stale, which is why internal shareholders try to cash in on some of their profits before any cyclical downturns materialize.
Concluding thoughts
Based on qualitative theory and quantitative metrics, Whirlpool will likely enter a cyclical downturn in the short run. The company's top-line earnings miss and the general softening in its earnings results are proof of such a possibility.
