WHR is down almost 5% since the stock ramped higher on earnings on Jan 31st. It’s down 4 straight days after what felt like an exhaustive move on Thursday. I initiated a put spread on Friday to take advantage of short-term weakness. However, with WHR essentially filling in its earnings gap in just 4 days, I am going to take the trade off here. I want to see how the stock behaves over the next week or two, after which I might re-initiate a position.
ACTION: Sold to Close WHR ($109.95) Mar 110 / 100 Put Spread at $3.30 for $1.10 gain
Original Trade Feb 1st, 2013:
Dan sent me this chart of Whirlpool stock yesterday afternoon, with the subject line, “this is nuts”:
It’s a quarterly chart of WHR stock going back more than 30 years. The volatility in the past 6 years is amazing, with the stock going from near 120, down to 20, back up to 120, down to 50, and now back up to near 120.
Whirlpool wouldn’t normally be a stock I would associate with such vicious volatility. It’s still in the same business it’s been ever since I was a kid, selling Whirlpool, Maytag, and Kitchenaid appliances around the world. It gets a little more than half its revenues from North America, about 25% from Latin America, 20% from Europe, and less than 5% from Asia.
Its sales growth during the past 6 years has been surprisingly stable (despite what the stock chart would suggest), as it has had an annual revenue number of between $17 and $20 billion in every year between 2006 and 2012. It’s the earnings volatility that has been surprising. Annual earnings per share (on adjusted basis) has fluctuated from 6.35 in 2006, 8.10 in 2007, 5.77 in 2008, 5.82 in 2009, 9.65 in 2010, 2.05 in 2011, and 7.05 in 2012. The drop in 2011 was due to litigation in Brazil as well as poor results, but amazing volatility in earnings nonetheless.
What’s the reason for the volatility? Margins. Here is the 10 year chart of gross margins:
The gross margin reached 7 year highs around 17% at the end of 2012, after Whirlpool instituted a restructuring program last year with the explicit intent of improving its margin situation.
Yesterday morning, Whirlpool reported 4th quarter earnings, and adjusted EPS beat, but more importantly, WHR raised its guidance for 2013 to $9.25 to $9.75, above the $9.09 consensus estimate. Lo and behold, the main reason for the higher guidance was the improved margins.
So the stock is currently priced at around 12x 2013 EPS, 16x 2012 EPS. But here is the 10 year chart of WHR P/E:
WHR hasn’t garnered a valuation multiple this high since 2006, which is not surprising given how volatile its earnings results have been. When the results are so unpredictable, investors are generally unwilling to pay as much for each dollar of earnings.
The way the stock has behaved in the past 6 months, market players have become more confident that the improvement in WHR’s recent trends are more sustainable than they’ve been in the past decade. In other words, WHR is on more stable footing, and poised to deliver more consistent business results.
However, I see a few reasons to be concerned:
- The improvement in margins has in large part been due to pricing increases in the U.S., which has actually decreased unit sales. That’s been a boon to earnings, but might be a warning for future top-line growth.
- International outlook not so rosy. Europe is still in the doldrums. Latin America has been stronger, but the company is overly exposed to Brazil.
- The technicals look tired. The 1 year chart shows declining momentum (red arrow on RSI below) on each thrust higher in the stock (green arrow), and yesterday’s push to new highs puts the stock close to the 115-120 area that has acted as resistance twice in the last 6 years. Here is the 1 year chart:
So here’s the trade:
TRADE: WHR ($113.75) Bought the Mar 110 / 100 Put Spread for $2.20
-Bought 1 Mar 110 Put for $2.90
-Sold 1 Mar 100 Put at $0.70
Break-Even on March Expiration:
-Profits between 107.80 and 100, max profit of 7.80 at 100 or below
-Losses up to 2.20 between 107.80 and 110, max loss of 2.20 at 110 or above
Trade Rationale: Implied vol looks cheap to me in WHR, as I’m paying 29 implied vol for the Mar 110 put, while 100 day realized vol is at 31, and 30 day is at 39. I think WHR has strong support around the 100 level, and wanted to give myself at least a month for a pullback to take place. I hope to take this off for at least a double on the next 5% pullback in the stock.