Whirlpool’s stock price has taken a beating over the past six months, shedding 39.2% of its value and falling to $57.71 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Whirlpool, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Whirlpool Will Underperform?
Despite the more favorable entry price, we're cautious about Whirlpool. Here are three reasons there are better opportunities than WHR and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Whirlpool’s demand was weak over the last five years as its sales fell at a 4.4% annual rate. This was below our standards and signals it’s a low quality business.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Whirlpool’s margin dropped by 7 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Whirlpool’s free cash flow margin for the trailing 12 months was breakeven.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Whirlpool’s $7.19 billion of debt exceeds the $669 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $1.07 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Whirlpool could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Whirlpool can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Whirlpool falls short of our quality standards. Following the recent decline, the stock trades at 10.5× forward P/E (or $57.71 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. Let us point you toward the Amazon and PayPal of Latin America.
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