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Earnings Growth
Whirlpool beat its Q2 earnings expectations by $290 million, extending its quarterly earnings beat streak to twelve. The company also beat its EPS estimates by $0.64, bolstering its phenomenal diluted EPS figure up to $30.00.
Cost-Saving Playing its Part
Whirlpool has spent time focusing on cost-saving initiatives such as reducing structural and discretionary costs by improving its supply chain efficiency, and managing its working capital more effectively.
Examining Whirlpool’s margins, it’s apparent that its initiatives have been successful. Gross profit margins have increased from 16.25% a year ago to 21.47% a year later, while operating margins have increased twofold (year-over-year) to 12.22%.
Balance Sheet Improvements
Whirlpool has delevered its balance sheet from roughly 110% to 38.5%. Combined with total asset growth of nearly $2 billion, that means intrinsic value has increased sharply.
Dividends
The company declared a quarterly dividend of $1.40 last month, in line with its previous payout. Investors should find comfort in the fact that Whirlpool has increased its dividend for 11 consecutive years, with plenty of capacity left.
Furthermore, Whirlpool’s dividend coverage is 95.73% better off than the industry median, and its free cash flow to dividend yield is 192.21% better off relative to its 5-year average. Both these metrics indicate that dividend increases are on the horizon, or rampant share repurchases as an alternative.
Valuation
Whirlpool stock is currently trading below its fair value. The stock’s P/E (7.88) and its Price to Book (2.75) ratios are trading below the industry median by 43.55% and 8.90%, respectively.
I’d also like to highlight that the company’s free cash flow yield of 17.75% has doubled over the past year while its EV/EBITDA trades 52.22% below the sector median.
A useful valuation technique is to compare the company’s free cash flow & EV/EBITDA growth with the price appreciation. If we consider the above mentioned growth rate and relative valuation to a stock price increase of only 28% year-over-year, I think it’s safe to say that Whirlpool still has value in abundance.
Wall Street’s Take
Wall Street thinks the stock is a hold. I’m afraid I have to disagree with the consensus, and contend that Whirlpool won’t only provide investors with a good option for dividend income, but price gains are also on the charts, according to relative valuation metrics.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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