Investors in appliance maker Whirlpool (WHR) are cleaning up. Since early February, the stock is up around 40% and is one of the best performing stocks in the S&P 500. I believe the stock will continue to rise.
Whirlpool was under pressure all last year. The strong dollar and a number of currencies in free fall wreaked havoc across the company's income statement. The Brazilian real declined 45%, the Russian rouble was chopped in half, the Canadian dollar and the euro fell about 15%. In all, Whirlpool had to absorb $5.7 billion in currency devaluations and weak sales across Brazil, China and Russia. Despite reducing its fixed costs by 35% in Latin America, profit declined 60%. All these issues took at least $4 per share out of earnings.
The only good news was the integration of Indesit and Hefei. It looks like the dealmaking is paying off. The Indesit acquisition gave Whirlpool twice the economies of scale in Europe and the #1 position in seven European countries. In addition, management was able to cut $350 million out of operating expense in Europe. The Hefei acquisition boosted Whirlpool's sales in China five-fold and gave it 10x the number of distribution points.
Since 2000, Whirlpool has doubled its annual sales -- from $10 billion to $20 billion -- while cutting its dependence on the slow-growing North American region. Management has realigned its brand strategy and taken the number of OEM (Original Equipment Manufacturer) brands down from 20% of revenue to 5%.
Management has made a conscious decision to grow profitably instead of using its previous strategy of sacrificing margins for market share. In fact, last year, earnings before interest and taxes in North America grew 13% with an 11.3% margin.
Investors are encouraged by the rebound in North America. Sales are expected to rise about 3% in 2016 and almost 5% next year led by strong shipments in North America and Europe.
But the real story is margin expansion. Gross margins are expected to rise from 18.8% in 2016 to 19.1% in 2017, compared to 17.7% in 2015, due to improved productivity, a richer product mix and a rebound in shipments. Operating margins should increase from 7.5% in 2015 to 8.4% in 2016 and could get as high as 9% in 2017.
While some analysts remain skeptical, first-quarter earnings (due to be reported on April 28) could be better than the consensus estimate of $4.67 billion and $2.67 per share, mostly driven by the recovery in the U.S. housing market. The improved profitability and low valuation should keep WHR going higher. I think investors will continue to clean up in Whirlpool.