Whirlpool’s corporate results over the past 5 years are a microcosm of corporate America for a modern industrial company. Whirlpool grew sales 10% from 2009 to 2013, but earnings have more than doubled in that period. In a competitive international environment for durable goods manufacturing, Whirlpool has squeezed more profits out of the same sales base by seemingly permanent restructuring, cutting costs and capacity for the past few years.
In other words, management has been hyper-focused on the bottom line even as the top line has stagnated. They’re feeling pretty good today, as here are the results for the stock over the past 5 years:
The stock had a very rapid move from below $30 to nearly $120 in 2009 and 2010, before WHR was hit by poor results and litigation in Brazil, sending the stock back to $50 by late 2011. However, the stock tripled from there, touching an all-time high of $160.01 in early January.
We traded WHR early last year on several occasions (for a slight overall gain). These were my broad thoughts in the first trade post from February:
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.
For much of the balance of 2013, Whirlpool had a very strong year, rising along with the industrial and housing-related stocks. However, WHR got whacked to start 2014 after a weak earnings report. WHR ended down 6.6% on its earnings report, its worst earnings-related performance since 2009.
On that report, WHR indicated that North America continues to be the bright spot, while Latin America is an ongoing concern, particularly given the political and social distress in the region at the moment. However, another concern for investors was the slightly worse-than-expected margins in the 4th quarter. While margins were only a slight miss, WHR’s margin improvement has been the main driver of earnings (again, top line has hardly grown) over the past 5 years. Given that sales are only expected to grow 3% annually over the next 3 years, no more margin improvement spells the end of earnings growth for WHR.
Technically, the stock’s selloff in late Jan / early Feb was on big volume, and the bounce since then looks vulnerable if the broader market comes under pressure in the next few weeks.
TRADE: WHR ($143.79) Buy the May 140/130/120 Put Fly for $1.77
– Buy 1 May 140 Put for $4.69
– Sell 2 May 130 Puts at $1.76 each ($3.52 total)
– Buy 1 May 120 Put for $0.60
Break-evens on May expiration:
Profits: btwn 138.23 and 121.77 make up to 8.23, with max gain of 8.23 at 130
Losses: losses of up to 1.77 btwn 120 & 121.77 and btwn 138.23 & 140 with max loss of 1.77 below 120 or above 140
Trade Rationale:
WHR has immediate support around $140, which coincides with the 200 day moving average. If that support breaks, we would expect a fast move down into the low 130’s, and possibly as low as the February low near $125. Long-term support of $120 is very unlikely to break in the near term barring a very bad earnings number in the late April report. With all of that in mind, the risk/reward of paying around $2 for the May fly makes sense to us. We’re going to take the trade off if the premium on the fly gets to $1.00 or below (a premium stop on the options structure), which we anticipate would come into play if WHR rallies to $150 or above in the short-term.