Sometimes when companies outline their strategic thinking the market chooses to ignore them and then be surprised when the results come out in line with the company’s strategy rather than with what the market chose to think. I think there was a bit of this mentality with Whirlpool Corporation (NYSE:WHR)’s recent results. Revenues were a bit less than market estimates but earnings were ahead. The company told us that its focus was on margin and cost reductions rather than purely revenues and volumes; why don’t we try taking that at face value?
Staring Into a Whirlpool
This is an activity that can produce confusing optics. The periphery may swirl around and signal danger but the center is calm. It’s a nice way to think about these results. Whirlpool Corporation (NYSE:WHR) declared it was on track to deliver on all its key metric such as profit margins, EPS and an impressive $600-650 million in free cash flow for the year. Most notably omitted from these metrics is revenue, and I suspect the reason is that the company intends on pushing ahead with margin expansion rather than chasing or holding market share. As a consequence there was no change to its full year guidance.
However the revenue numbers got the market worried. On an adjusted basis sales were flat at $4.3 billion but adjusted operating profits were up 21% to $280 million and free cash flow improved by $139 million to an outflow of $376 million. So margins and cash flow improved but sales didn’t.
Nobody likes companies that aren’t increasing sales, but there is a rationale for it. Whirlpool Corporation (NYSE:WHR) is trying to achieve margin expansion in an industry that is coming off a historically low base, so the opportunity for leverage is significant. Operating margins rose to 6.6% in the quarter with the longer term aim being to get them up to 8%. I think this strategy makes sense in a rising market but, make no mistake, if the market does turn down again Whirlpool Corporation (NYSE:WHR) will suffer inordinately compared to its peers.
The stock is very much a directional play on US and Latin American housing. EMEA (nearly 16% of sales) is a significant region, but conditions are tough there and the forecast is for flat revenues in 2013 while Asia is not a significant region (4.4% of sales). Hopes rest on the US and emerging markets, particularly Brazil.
Will it Work?
Whirlpool Corporation (NYSE:WHR) seems to be of the opinion that promotional activity won’t necessarily increase market share and appear to be jejune to the threat posed by LG and Samsung selling into The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW). Indeed, LG saw some margin erosion in its last quarter. All of which leads to a classic investment proposition. Do you favor a company gaining market share with margin erosion or one like Whirlpool Corporation (NYSE:WHR)that tends to hold margin but is willing to lose some market share?