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From Grant’s Interest Rate Observer

Everybody out of the pool!  Investors in Whirlpool Corp. (WHR on the NYSE) are throwing in the towel today after the Benton Harbor, Mich., home appliance behemoth once again fell short of consensus expectations. Weaker than expected earnings and revenues marked a fourth consecutive quarterly shortfall, while the company also trimmed its 2017 earnings per share guidance for a third straight time.  Margin compression was a chief negative catalyst:  On the conference call, management cited “significant raw material inflation and freight mix weakness,” along with “related promotion intensity” for the unwelcome shrinkage.
As might be expected amidst this run of futility, no shortage of bad news accompanied the release.  For instance, the company announced the termination of a 101-year-old business relationship with Sears Holdings Corp. amidst a pricing dispute. Sears released a memo accusing its ex-partner of “[seeking] to use its dominant position in the marketplace to make demands that would have prohibited us from offering Whirlpool products to our members at a reasonable price.” Whirlpool CEO Marc Bitzer countered by noting that “the entire Sears business declined over time.” Bitzer pegged Sears business at 3% of the company’s global revenues on today’s call. It was 8% in 2011.
Industry data also pose a concern.  In particular, the most recent reading of the Association of Home Appliance Manufacturers Factory Shipment Report (AHAM-6) showed a sharp deceleration in growth.  September home appliance sales grew by just 1.3% from 2016, far below the 3.5% advance seen year-to-date and the 6.6% compound annual growth rate in the four years ended 2016.  Major categories such as dishwashers, washing machines and both electric and gas cooking appliance sales shrank from their 2016 levels in September.  The destructive hurricanes may have played a role, but then again, new home sales in September rose by 6.1% year-over-year on a seasonally adjusted annual rate.  Year to date, the new home sales SAAR has gained by 3.1% over the first nine months of 2016.  Those divergent fortunes are reflected in recent share price outperformance of the SPDR S&P Homebuilders ETF (XHB on NYSE ARCA) against Whirlpool:
In a Feb. 10 analysis of Whirlpool it was postulated that the accelerating housing market may bestow less favorable winds on the white-goods industry than might be expected, while the post-housing bubble replacement cycle that underpinned the industry’s strong sales growth through 2016 might be set to wane.
[Replacement purchases] account for no less than 50% of overall appliance sales (purchases related to new homes deliver just 20%). So you can expect that a boom would be followed by a kind of echo-boom. And so it has proved recently. The average major appliance lives for eight to 12 years. So the big spending years of 2001 through 2005 have whistled up a second bulge in appliance purchases.
That bulge may have come and gone.
Whirlpool’s industry-leading margins likewise caught the attention of Grant’s, both as a mark of its operational success and as a potential bearish catalyst in the future:
[North American operating margins] reached 11.5% last year, roughly double the average margins of the global competition and 38% greater than the 20-year average margin earned by Whirlpool itself in Canada, Mexico and the United States.
We’re not the only ones who notice this yawning, golden disparity. Foreign white-goods makers, too, observe what riches the top American appliance maker plucks from North America. On form, they will try to move in, fat profits being the red carpet to determined competition.
For its part, Whirlpool management is drawing a line in the sand.  Questioned by analysts over the company’s 2020 earnings targets in light of the trio of cuts to this year’s guidance, Bitzer responded unequivocally:
We’re fully standing behind this. We’ve been part of developing these targets and we’re not going to back off. I know given that it’s my CEO call for an earnings call, probably we’ll be needing one to put some question marks behind this one, but we don’t. We’re fully behind it. We’re committed, which also means for next year without giving any 2018 guidance, our entire focus will be on margin expansion and we need to catch up what we lost this year.
No pressure!
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