After the close tonight, appliance manufacturer Whirlpool (WHR) is set to report its fourth quarter results with analysts expecting the company to deliver EPS of $4.24 on revenue of $5.76 billion. As we discuss in more detail below, the company has quite a volatile history when it comes to its performance relative to expectations, often exceeding or missing the consensus numbers by wide margins.
There are many moving parts to its business, including fluctuating raw material costs, its exposure to the housing market, new price and cost reduction initiatives, and exposure to softening geographic markets like EMEA. In addition to all those factors, WHR does not provide quarterly guidance (only annual), so analysts are in the dark as far as the company's near-term outlook is concerned. This unpredictability, as it relates to WHR's performance versus expectations, adds an element of risk to the equation for investors.
As for the recent stock action, the stock has stalled out over the past couple of weeks after jumping by about 25% off its December 24 lows.
Recent Earnings History/Key Metrics
Last quarter, WHR reported EPS of $4.55, crushing analysts' forecast of $3.76. Revenue dipped by 1.7% to $5.3 billion, inline with expectations. With the upside result, WHR boosted the low end of its FY18 EPS guidance range to $14.50-$14.80, from $14.20-$14.80, well ahead of the $13.99 consensus. The company also guided for FY18 cash flow from operations of $1.2 billion and free cash flow of approximately $600 million. The next day, the stock jumped by 7%.
Illustrating the "hit or miss" nature of WHR's results, this followed a Q2 in which the company badly missed estimates. Specifically, EPS came in at $3.20 vs. the $3.66 consensus on revenue of $5.14 billion compared to the $5.29 billion estimate. The company also issued downside guidance for FY18 ($14.20-$14.80 vs. $15.62).
Going further back, WHR missed on both the top and bottom lines in Q1, but, comfortably exceeded analysts' EPS expectations ($4.10 vs. $4.02) in 4Q17.
Outside of the main headline numbers, the key metric investors and analysts will hone in on is ongoing EBIT margin. Last quarter, ongoing EBIT margin came in at 6.2%, down from 6.6% in the year-ago period.
In short, WHR's roller-coaster results are not ideal for investors interested in a solid, stable company like WHR. Since its quarterly results are so whippy, longer-term investors would be better served focusing on the overall execution, financial condition, and outlook for WHR, while just trying to stomach the shorter term volatility in the stock that comes along with the unpredictable quarterly results.
Raw Material Cost Pressures & Cost-Based Pricing Initiative
Rising commodity and raw material costs have been a common theme over the past few quarters, and Q4 is no exception. Companies like Proctor & Gamble (PG), Colgate-Palmolive (CL), Sherwin-Williams (SHW) are just a few that experienced margin pressures in calendar Q4 from higher material costs.
Last quarter, WHR commented during its earnings call that raw material inflation continued to be a significant headwind, impacting Q3 gross margin by 175 basis points.
In order to curb these pressures, early in 2018, the company introduced cost-based pricing, while also improving product mix across multiple regions. This strategy has paid dividends for WHR as price/mix improvements drove 250 basis points in margin expansion. In fact, in Q3 it expanded ongoing EBIT margins to 12% from 11.8% in North America - its largest market at 57% of revenue - despite soft U.S. industry demand and continued cost pressures as it increased its share position.
On that note, WHR launched a number of new connected kitchen products, and also made two significant laundry platform investments, totally $100 million. Combined with the new pricing initiatives, these new product launches help drive a 5.3% increase in North America revenue.
EMEA/Cost Reduction Program
EMEA (20% of revenue) has been an ongoing soft spot for WHR, with revenue down 7.6% in the region last quarter. The company said it has seen some improvement there in Q3, but, the pace of improvement has been slower than it would like. Therefore, it has undertaken a series of actions to improve results and right-size the business.
These include exiting a number of businesses that are losing money, such as its Turkish operation, as well as its Hotpoint branded small appliance business. Additionally, it is evaluating its South African operations for a potential sale as it re-focuses on its core European business. Combined, these initiatives represent $230 million in revenue and a substantial $60 million EBIT loss for FY18.
On top of that, WHR also announced a $50 million fixed cost reduction program for the region, which is expected to deliver benefits this year.
Housing Market Has Slowed, But, WHR Remains Optimistic
WHR's business is highly correlated to the housing market, which might not be good news for investors heading into WHR's earnings report. The housing market has continued to cool-off as home buyer traffic fell 14% in December, following a 12% dip in November. Furthermore, existing home sales were down 10% year-over-year in December, after declining 7% in November.
Of course, the rise in mortgage rates have provided a headwind, as has the tight supply, which elevated home prices much faster than many had predicted. This has stretched affordability, especially in some of the hottest markets in the coastal areas.
During its Q3 earnings call, WHR acknowledged the sluggish housing market, but, reiterated that there are some positive factors that it expects will create a strong housing market. For instance, the lack of supply has held back the recovery as housing starts have remained well below the 25 year average of 1.3 million units. Accordingly, home ownership remains at a 52 year low. Additionally, the current age of the U.S. rental stock is now 40 years and 100% of the new apartment supplies since the recession has been fully absorbed. This should generate strong demand for rental homes and apartments.