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Whirlpool Banks on Cost Efficiency Moves Amid Inflation Woes

Zacks Equity Research

Whirlpool Corporation WHR is gaining from robust product pipeline, solid innovations and cost productivity initiatives. The company is also on track with the global cost-based price increases and fixed cost reduction initiatives. Further, its North America division has been performing well.

However, the company is witnessing lower sales in most of the regions, except North America. Also, cost inflation and adverse currency fluctuations are major concerns.

In the past six months, shares of this Benton Harbor, MI-based company have increased 16% compared to the industry’s growth of 17.4%.

Let’s look at the both sides of the story.

Factors Driving Whirlpool’s Performance

Whirlpool’s cost-based price increments and cost-reduction initiatives focused on improving business efficiency bodes well. It implemented global cost-based pricing for trade customers along with initiatives to cut fixed overhead expenses by $150 million in first-quarter 2019. Backed by fixed cost discipline and a favorable product price/mix due to pricing gains, the company reported operating margin expansion of 30 basis points in the first quarter. Moreover, it expects price/mix to aid margin growth throughout 2019, with slight moderation on a year-over-year basis due to comparisons from higher pricing undertaken in the second half of 2018.

For 2019, the company anticipates ongoing EBIT margin of 6.5-6.8%, representing a 40-bps expansion from 2018. This guidance reflects 150-bps gains from price/mix and net cost improvement of 50 bps based on revised industry demand and related lower production volume expectations. Further, it expects reduced cost inflation of nearly 25 bps for 2019, owing to slowed down raw material cost inflation.

Furthermore, this Zacks Rank #3 (Hold) company is benefiting from strength in the North America division. In the first quarter, sales in the North America segment were flat year over year and up 1.1% on a currency-neutral basis. Operating margin in North America expanded 90 basis points (bps), backed by favorable product price/mix despite pressures from higher costs, lower industry demand and decline in unit volume. The company expects to continue delivering strong results in the region, driven by favorable price/mix and price increases despite expectations of lower demand.

Apart from these, Whirlpool’s robust product pipeline, solid innovations and cost productivity initiatives keep it on track to achieve its long-term goals. The company has outlined significant long-term targets through 2020, backed by brand strength and product portfolio. Moreover, it aims to deliver organic revenue growth of 3-5% every year. The company targets EBIT margin to exceed 10% by 2020 and envisions earnings per share to grow 10-15% each year. It anticipates delivering roughly 4-5% margins, along with 8% margin in Europe.

Possible Deterrents

Whirlpool is witnessing dismal sales trend, having lagged estimates for the eighth straight time in first-quarter 2019. The company’s top line fell 3.1% in the recent quarter mainly due to lower sales across all operating segments, except North America. Sales across segments were mainly affected by soft industry demand in some countries, including the United States, Canada, Mexico, China and several European countries. Notably, industry demand declined 7% during the first quarter.

Moreover, the company is grappling with higher cost inflation and adverse currency fluctuations, which is denting margins. The company continued to witness pressures from cost inflation, unfavorable productivity related to lower unit volume and adverse currency, which partly offset gains from improved price/mix. Cost inflation offset operating margin by more than 125 bps in the first quarter. Though the company estimates reduced impacts of cost inflation in 2019, it still expects cost inflation and unfavorable currency to offset benefits from improved price/mix by nearly 250 bps in 2019.

Nevertheless, we expect the company’s aforementioned efforts to offset these hurdles and help it win back investors’ confidence.

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