We are downgrading our long-term recommendation on Whirlpool Corporation (WHR) to Neutral. The company might face significant headwinds due to its high customer concentration, rising input costs and price increments of its products.
Following the rise in material costs (mainly the price of steel), Whirlpool has increased the price of its products. This strategy might be detrimental to the company’s market share, provided some of its major competitors from Korea, including LG Electronics and Samsung, retain their existing prices.
In addition, the company has a high level of customer concentration. Its large trade customers include Sears (SHLD), Lowe’s (LOW), Home Depot (HD), Casas Bahia, Best Buy (BBY) and Ikea, that command significant leverage as buyers and can demand favorable pricing from Whirlpool at the cost of its margins.
Also, most of Whirlpool’s products are not sold through long-term contracts to these customers. Sales volumes undergo frequent adjustments and might affect operations.
Whirlpool posted mixed results in the first quarter of 2012. The company saw its adjusted earnings increase to $1.41 per share from 64 cents last year, surpassing the Zacks Consensus Estimate of $1.12 in the process.
Also, revenues in the quarter dipped slightly to $4.35 billion from $4.40 billion last year, as an improvement in product price/mix was offset by unfavorable currency, lower industry demand and lower monetization of tax credits. As a result, Whirlpool failed to meet the Zacks Consensus Estimate of $4.37 billion.
However, we are not discounting Whirlpool completely, keeping in mind its industry-leading position. Whirlpool is the largest manufacturer of home-appliances in the world, ahead of companies such as Electrolux AB (ELUXY), LG, Samsung and General Electric Co. (GE).
The company’s operations are spread across the globe. It derived 51% of its revenues from North America, 27% from Latin America, 17% from Europe, the Middle East and Africa, and 5% from Asia last year. This geographic diversification has enabled Whirlpool to keep its top line stable in difficult economic times as it eliminates some of the risks arising from concentration in one region.
Moreover, Whirlpool is highly focused on product innovation. The company’s consistent investment in research and development (R&D) is reflected by its R&D spending of $500 million in 2009, $532 million in 2010, and $578 million in 2011. Whirlpool’s R&D efforts are bearing positive results as its new products are gaining acceptability among consumers and driving the company’s positive price-product mix.
Our recommendation on Whirlpool is backed by a Zacks #3 Rank, reflecting a short-term (1 to 3 months) Hold rating.
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