The past six months haven’t been great for Whirlpool. It just made a new 52-week low of $39.15, and shareholders have lost 46.8% of their capital. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Whirlpool, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Whirlpool Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in Whirlpool. Here are three reasons we avoid WHR, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Whirlpool’s demand was weak over the last five years as its sales fell at a 5.8% annual rate. This was below our standards and is a sign of poor business quality.
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 5.4 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s in the middle of a big investment cycle. Whirlpool’s free cash flow margin for the trailing 12 months was breakeven.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Whirlpool’s $7.10 billion of debt exceeds the $626 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $913 million 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 doesn’t pass our quality test. After the recent drawdown, the stock trades at 10.6× forward P/E (or $39.15 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. Let us point you toward one of our all-time favorite software stocks.
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