MorningWord 4/28/15: $WHR – Down The Drain?

by Dan April 28, 2015 9:30 am • Commentary

Shares of Whirlpool (WHR) are down 7% in the pre-market, The home appliance maker cut its full year earnings guidance to $9 to $10 a share vs $10.75 consensus, representing an 11% haircut.  WHR gets about 45% of its sales from overseas, and about 25% from Latin America, with the company specifically citing weak demand in Brazil and the adverse affects of currency headwinds.

Heading into the print I think it was safe to say that the potential for foreign exchange and weakness in emerging markets to weigh on results was a fairly well known quantity, but the stock’s 9% decline from the 52 week and all time highs made in February might have discounted the headwinds:

WHR 6 month chart from Bloomberg
WHR 6 month chart from Bloomberg

But math is math, and if you cut earnings guidance by 10% in a perfect world the equity of your company should reflect this new outlook.  On the flip side, WHR’s 55% gains from the October lows, to its recent highs might have also reflected investor’s expectations for 23% year over year earnings growth, and 17% sales growth.

WHR 2yr chart from Bloomberg
WHR 2yr chart from Bloomberg

Coming into today, if those expectations were sound and the the stock was trading at 14x expected 2015 earnings and 12x next year, made the play on home improvement cheap to many peers.  So if you subscribe to such axioms as the efficient market hypothesis, then WHR’s price action over the last 6 months makes some sense, the stock was too cheap in the fall when the company guided to 20% eps growth for 2015, and it is now too expensive as the company reduces this outlook.

Sometimes we can glean some clues from the options market as it relates to investor sentiment leading up to a potentially volatile event, but in the case of WHR, options trade by appointment. There was no build up in open interest one way or the other, and implied volatility (options prices) were below levels where they had been prior to the last few quarterly reports, reflecting an implied move that was below the long term average. In hindsight, all of this reflected a bit of complacency .

Many of you may not care too much about WHR as a company or a stock, but in some ways the price action today could be telling for U.S. multi-nationals who for the most part in Q2 earnings season have been given a pass as weak global demand and the strength of the dollar were very well known quantities.  But the fact that a stock like WHR had disregarded these headwinds, and is now being punished demonstrates that there are pockets of complacency out there.

And I would argue, given the delicate balance of global equity strength, and global economic weakness, stocks have little room for error in the event the demand does not pick up and the dollar stays strong.