Whirlpool Corporation WHR is trying all means to boost growth at its EMEA segment, which has been sluggish for a while. Moreover, weak industry trends in China are hurting its Asia unit’s EBIT growth, which is likely to persist in the second half. Management lowered its margin guidance for Asia to nearly 3%, as it expects gains from strong India business to be more than offset by weak industry trends in China.
In addition, a weak industry demand across regions remains a headwind. The company reiterated its 2019 industry demand guidance for most regions, except for the North America segment. Owing to the negative industry demand witnessed in Mexico and China during the first half, the company anticipates industry demand in Latin America and Asia to be at the lower end of the prior guidance. Furthermore, Whirlpool is witnessing pressure from higher cost inflation, increased marketing and technology investments, and adverse currency.
Whirlpool’s Strengths & Cost-Productivity Efforts
Despite the above-mentioned drawbacks, shares of this leading home appliance maker have gained 49.3% year to date, ahead of the industry's 46.8% rally.
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This upside is driven by Whirlpool’s robust earnings surprise trend, with second-quarter 2019 marking the fourth consecutive quarter of beat. Moreover, its sales reverted to a positive trend after eight straight quarters of miss. Higher sales, margin expansion and cost-containment efforts as well as robust margin expansion in North America are driving the bottom line. Strength across all segments, except for EMEA, is aiding sales.
Backed by strong results in the first half, Whirlpool raised earnings view for 2019. Management now envisions adjusted earnings per share of $14.75-$15.50, up from $14-$15 mentioned earlier. In 2018, it recorded earnings of $15.16 per share.
Whirlpool’s efforts toward cost-based price increments and cost-reduction initiatives, focused on improving business efficiency, are reaping benefits. To counter raw material inflation and other cost headwinds, the company implemented global cost-based pricing for trade customers along with initiatives to cut fixed overhead expenses by $150 million. Fixed cost discipline coupled with favorable product price/mix is likely to aid margin growth throughout 2019.
For the current year, the company now anticipates adjusted EBIT margin of 6.8%, which is at the higher end of the previously stated 6.5-6.8%. This reflects an improvement of 50 basis points (bps) from 2018. The guidance now reflects 175-bps gain from price/mix (previously 150 bps) and net cost benefits of 25 bps or just accretive to margins. Further, the company favorably revised cost inflation guidance by 50 bps for 2019, owing to slowed down raw material cost inflation.
With regard to its soft EMEA segment, Whirlpool has been undertaking restructuring actions to rightsize the business. In fact, it remains encouraged about executing proper actions to restore sales volume and enhance operational footprint in the region. Although management revised the division’s EBIT guidance for 2019 to be at the low-end of the previous range, this stems from additional restructuring efforts to improve the EMEA business.
Encouragingly, it expects roughly 5% volume growth in EMEA in 2019. Also, the EMEA margins are anticipated to improve during the second half, owing to cost-reduction efforts. We expect the company’s EMEA unit to return to growth based on the aforesaid restructuring actions.
Furthermore, Whirlpool’s robust product pipeline, solid innovations and cost-productivity initiatives keep it on track to achieve its goals through 2020. The company aims to deliver organic revenue growth of 3-5% every year. Additionally, it targets EBIT margin to exceed 10% by 2020 and envisions earnings per share to grow 10-15% each year. It also anticipates delivering roughly 4-5% margins along with 8% margin in Europe.
With all said, we believe that this Zacks Rank #3 (Hold) stock currently deserves a place in your portfolio. Whirlpool’s long-term expected earnings growth rate of 5.3% and a VGM Score of A further highlights the stock’s potential.
3 Key Picks in the Consumer Discretionary Space
Crocs, Inc. CROX delivered average positive earnings surprise of 140.8% in the last four quarters and presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Funko, Inc. FNKO, also a Zacks Rank #1 stock, has an impressive long-term earnings growth rate of 20.7%.
lululemon athletica inc. LULU has an expected long-term earnings growth rate of 18.2% and a Zacks Rank of 2 (Buy).
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