Strategic Deals Might Not Be Enough for This Appliance Company

Motley Fool

Take a look in your kitchen or laundry room. There's a pretty good chance you will find a Whirlpool (WHR) product somewhere, whether it's a washer, dryer, refrigerator, dishwasher, or freezer. Whirlpool doesn't just sell its namesake brand; it also sells Maytag, KitchenAid, Brastemp, and Consul, all of which generate over $1 billion in annual revenue each. Whirlpool has made a number of strategic deals that may bring it even greater success in the future. Unfortunately, that doesn't mean that this is the best time for investors to get involved.

Current strategy
Whirlpool aims to innovate, make strategic deals, and expand geographically. For instance, Whirlpool is currently expanding its presence in India, Latin America, and China. Latin America might be the safest of the three at the moment -- there are concerns of a currency crisis in India and China is seeing decelerating growth. Then there's the United States, where the consumer is overly cautious and constantly looking for value. These trends don't exactly bode well for Whirlpool. However, Whirlpool has been wheeling and dealing in order to improve its top line.

Recent moves
Up until this point in time, Whirlpool's exposure in China has only allowed it to target the high-end consumer. That's about to change now that Whirlpool acquired 51% of Hefei Rongshida Sanyo Electric (a home appliance manufacturer in China). This will give Whirlpool much broader exposure in China, and it will allow Whirlpool to target the middle-income consumer, who has seen rising income in recent years.

Whirlpool has also made a deal with Chesapeake Energy , where Whirlpool has been asked to develop a product that will allow consumers to refuel their natural-gas-powered cars at home. According to Navigant Research, the number of natural gas vehicles on the road is expected to reach 34.9 million by 2012 (currently 18.2 million vehicles). Natural gas might be cleaner, and there might be great potential for Chesapeake and Whirlpool, but they still have to contend with the increasing popularity of electric cars. The insiders at Chesapeake are confident about something, because they continue to buy the company's shares.

Whirlpool has also made a deal with SodaStream (SODA) . If you're not familiar with SodaStream, it provides an in-home carbonation system that can turn water into soda and other beverages. SodaStream will now make carbonated drinks for KitchenAid appliances.

The deal with SodaStream has the potential to boost Whirlpool's revenue, especially considering SodaStream's rapid growth. This collaboration is expected to launch during the holiday season. If you're considering an investment in SodaStream, it's a growth play with strong upside potential. Also keep in mind, there's a 49.20% short position on the stock.

If you consider the big picture and look at Whirlpool's top and bottom lines, then you will see that these deals were necessary, since the top line hasn't impressed lately:

Metric

2008

2009

2010

2011

2012

Revenue (in billions)

$18.91

$17.10

$18.37

$18.67

$18.14

Diluted EPS

$5.50

$4.34

$7.97

$4.99

$5.06

If you would prefer a more diversified company that hasn't shown any slowdown on the top line, and recently had its CEO, Dave Cote, named "CEO of the Year" by Chief Executive Magazine, then you might want to consider Honeywell (HON) .

Like Whirlpool, Honeywell sells home products, such as thermostats, humidifiers, air purifiers, safes, shredders, and more. But Honeywell's product diversification goes well beyond that, and includes everything from aerospace to automotive to health care. Here's a snapshot of Honeywell's annual top and bottom-line performances over the past five years:

Metric

2008

2009

2010

2011

2012

Revenue (in billions)

$36.56

$30.91

$33.37

$36.53

$37.67

Diluted EPS

$3.76

$2.85

$2.59

$2.61

$3.69

Now consider some key metrics for the three aforementioned companies:

Metric

Forward P/E

Net Margin

ROE

Dividend Yield

Debt-to-Equity Ratio

Short Position

Whirlpool

11

3.53%

14.95%

1.90%

0.53

3.10%

SodaStream

19

9.94%

18.18%

N/A

0.05

49.20%

Honeywell

15

8.40%

24.46%

2.00%

0.55

0.90%

All three companies are fundamentally sound. Honeywell turns the most investor dollars into profit (ROE) and revenue into profit (net margin), and it yields 2.00%. However, Whirlpool is only trading at 11 times forward earnings, and it yields 1.90% itself.

Conclusion
Whirlpool is a long-term winner and it's shareholder-friendly. On the other hand, it will be difficult for Whirlpool to see consistent stock appreciation without significant downside risk until the consumer recovers. It will be a challenge for Whirlpool to significantly increase its sales in the current economic environment. That said, the aforementioned deals do have the potential to accomplish this goal. All factors considered, Whirlpool looks a little risky here, but this story is well worth visiting again in the near future.

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