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Whirlpool (WHR) Stock Up 28% YTD: Will Momentum Sustain?

Zacks Equity Research

Whirlpool Corporation WHR is benefiting 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.

All these factors helped the company to deliver robust second-quarter 2019 results, wherein earnings and sales outpaced the Zacks Consensus Estimate and grew year over year. Notably, this marked its fourth consecutive quarter of positive earnings surprise, with sales beating the consensus mark after eight straight misses. As a result, the company raised guidance for 2019. (Read: Whirlpool Beats on Q2 Earnings & Sales, Ups EPS View)

We note that, shares of this Zacks Rank #3 (Hold) stock have increased approximately 28% year to date, outpacing the industry’s growth of 24.3% and the broader Consumer Discretionary sector’s gain of 15.5%.

Factors Driving Whirlpool’s Performance

Whirlpool’s cost-based price increments and cost-reduction initiatives are focused on improving business efficiency. The company’s second-quarter 2019 results reflected the effectiveness of the various measures undertaken to boost margins. Although Whirlpool continued to witness higher cost inflation, it implemented global cost-based pricing for trade customers via initiatives to cut fixed overhead expenses by $150 million. Lower fixed costs and favorable product price/mix due to pricing gains aided operating margin expansion in the second quarter.

Management 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 now anticipates adjusted EBIT margin of 6.8%, which is at the higher end of the previously stated 6.5-6.8%. This indicates a 50 basis points (bps) improvement from fiscal 2018. The guidance now suggests 175-bps gain from price/mix (previously 150 bps) and net cost benefits of 25 bps or just accretive to margins. Further, the company favorably revised cost inflation guidance by 50 bps for 2019, owing to slowed down raw material cost inflation.

Despite a challenging industry backdrop, Whirlpool is experiencing growth momentum at its North America division. Also, operating margin in North America expanded 50 bps on favorable product price/mix and continued cost discipline. This marked the seventh straight quarter of margin growth for the North America segment. Moving ahead, management expects to continue delivering strong results from this region, driven by favorable price/mix and cost increases.

Whirlpool has outlined significant financial targets through 2020, backed by brand strength and product portfolio. The company aims to deliver organic revenue growth of 3–5% every year. Additionally, it targets EBIT margin to exceed 10% by 2020 and envisions earnings per share to grow by 10–15% each year. Furthermore, Whirlpool anticipates delivering roughly 4-5% margins along with 8% margin in Europe.

Hurdles on the Way

Whirlpool delivered top-line growth in Asia due to gains from its India business. However, China remained a deterrent to EBIT growth as it experienced negative industry demand in the first half. The company witnessed significantly weak volume in China, driven by industry trends, largely offsetting growth in India. Further, it increased brand investments in China as it transitions from Sanyo branded products to the Whirlpool brand. This led to a 650-bps contraction in the EBIT margin in the second quarter in Asia, despite gains from favorable product price/mix. Further, the segment reported an operating profit of $15 million, which plunged 65.1% from the year-ago period. The company lowered its margin guidance for Asia to nearly 3%, as it expects gains from India business to be more than offset by weak industry trends in China.

Despite positive margins, Whirlpool continued to witness pressures from higher cost inflation, increased marketing and technology investments, and adverse currency, which partly offset gains from improved price/mix. Though the company estimates reduced impacts of cost inflation, it still anticipates cost inflation and unfavorable currency to continue to offset benefits from improved price/mix in 2019. Further, it expects increased marketing and technology investment in 2019. These should partly offset operating margin growth in 2019. Also, the company anticipates soft EBIT in EMEA as it plans to undertake restructuring actions to further right size its business.

Nevertheless, we expect all aforementioned growth drivers to offset these hurdles and help Whirlpool to sustain its solid stock momentum.

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