Whirlpool Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Whirlpool Corporation is a global manufacturer and marketer of home appliances, offering a wide range of products across different geographic segments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Whirlpool Corporation operates in the home appliance industry, manufacturing and marketing a variety of major home appliances, including laundry machines, refrigerators, cooking appliances, and dishwashers. They distribute these products through a range of channels: retail stores, distributors, and online. They are a global company and operate in different geographic segments such as North America, Latin America, Asia and EMEA (Europe, Middle East, and Africa).

Here’s a more detailed breakdown:

  • Product Segments: Whirlpool’s portfolio is diverse and include laundry machines, refrigerators, cooking appliances, and dishwashers. These products are sold across various price points. They also produce smaller home appliances such as water filtration systems, trash compactors, and some kitchen utensils.
  • Geographic Segments:
    • North America (NA): The North America region is the biggest segment. They sell Whirlpool, KitchenAid, and Maytag branded products. The United States and Canada make up the majority of this segment.
  • Whirlpool has the best-selling laundry brand in North America
  • EMEA (Europe, Middle East, and Africa): They are present in over 30 European countries, Middle East, and South Africa. They operate under different brands, including Whirlpool, Indesit, Hotpoint, Bauknecht and Hotpoint Ariston. They also produce parts for a joint venture with Arcelik.
  • Latin America (LA): This segment is also heavily based on Whirlpool-branded products, such as Consul, Brastemp, and Whirlpool. The company has a major manufacturing presence in Brazil and sells to countries across Latin America. * Asia (Asia, including India): Whirlpool operates in various countries across Asia with major manufacturing capacity in China and India.
  • Distribution Channels: Whirlpool uses diverse distribution channels to reach consumers, they sell to big retail chains like Lowe’s and Home Depot in North America, through department stores and appliance specialty retailers, through direct to consumer sales online, and through distributors that reach other smaller retailers.

The home appliance industry is highly competitive. Competitors include: Samsung, LG, Haier, Bosch, Electrolux, Miele, and various smaller players. Some characteristics of the industry:

  • Cyclicality: Demand for home appliances is correlated to the housing market and overall consumer confidence, meaning demand can fluctuate with economic conditions. Also large capital expenses required by players result in high fixed costs.
  • Technological Innovation: Innovation in smart, energy-efficient appliances is a key competitive differentiator. More companies are incorporating AI and machine learning into their appliances, offering customers new features.
  • Raw Materials: The industry is impacted by a volatile supply of raw materials, and labor shortages. In recent years, these have led to cost increases and supply chain disruptions.
  • Geographic Differences: Different countries have different product tastes and preferences. Brands need to adapt their marketing and sales based on geography. Emerging markets have their own unique set of challenges and opportunities, including a different focus on brand versus value.
  • Consolidation: The appliance industry is relatively fragmented, and smaller companies tend to get bought out as scale and economies of scale become more important, and larger companies wish to expand into new markets.
  • Sustainability: Companies face increasing pressure from consumers and regulations to become more sustainable in their operations, especially relating to product design, manufacturing, and packaging.

Whirlpool’s position in this industry is unique because they are one of the world’s largest appliance manufacturers and have significant geographical diversification. However, this doesn’t mean they are immune to the pressures from economic, technological, and environmental conditions.

Financials in-Depth

Whirlpool has historically been a fairly stable business, but its financials have been quite volatile lately. Here’s a more detailed overview of the relevant financials:

  • Revenues: The company’s revenues tend to be higher in North America. They depend on a mix of factors, including the strength of the housing market, consumer spending, and promotional activity. Revenues are also susceptible to global economic headwinds and foreign currency exchange fluctuations.
  • Operating Margins: Net margins have historically been in the 4% to 8% range. They have been highly variable with large changes year over year, often impacted by the factors we talked about above. These margins are also affected by raw material prices and tariffs.
  • Return on Invested Capital (ROIC): ROIC has been variable as well, typically staying within the 10%-20% range. This highlights that in good times the business can be profitable, but it can have high volatility in times of struggle. The presence of debt is another factor, as it increases ROIC, but can decrease profitability in times of high rates.
  • Cash Flow: The company consistently generates positive operating cash flow, which is used to finance capital expenditures, repay debt, and pay out dividends.
  • Debt: The company has relatively high level of debt in their balance sheet with high fluctuations in short-term debt. They have been using it to finance acquisitions and expansions into new markets.
  • Historically, they have prioritized paying out dividends, but they have also been conducting share repurchases.
  • Key recent changes/controversies:
    • Recent earnings calls have shown management concern about a decline in demand for home appliances. This is mainly caused by inflation and high interest rates.
    • They have also been trying to balance declining sales with improving margins.
    • They have been actively pursuing acquisitions, especially in emerging markets, to capture growth opportunities and try to insulate their business against the changing macro environments in developed markets.
    • They have started focusing on simplifying their supply chain and improving their efficiency to reduce costs.
  • They have recently faced many problems including large goodwill and impairment charges due to acquisitions. They are in the process of reassessing their brands and operations and might be forced to take additional impairment charges in future periods.

Moat Analysis: 3/5

Whirlpool has some elements of a moat but it is not impenetrable and can easily be eroded. It has some advantages that could contribute to a narrow economic moat:

  • Brand Recognition: Whirlpool owns some well-known brands (Whirlpool, KitchenAid, Maytag, Consul) that have a long history of reputation for quality and reliability. The challenge for this kind of moat is that popular brands can be easily copied or imitated. Also as shown by the many recent controversies, consumer demand for brands can diminish.
  • Distribution Networks: Their massive and far-flung distribution network is hard to replicate. The amount of time and money necessary to set up a distribution network the size of Whirlpool’s would be substantial. However, other firms are able to use retailers and wholesalers to distribute their products, which reduces this advantage.
  • Switching Costs: Some of their products, like appliances built into a kitchen, have a small level of switching cost for consumers. But the vast majority of appliances don’t have high switching costs as they are easily replaced.
  • Scale: Whirlpool benefits from scale and scope efficiencies in manufacturing and distribution. Being a big player in a competitive market helps with negotiating better prices for supplies. However, it seems that these efficiencies have not translated into better pricing or better returns than their peers.
  • Overall, I believe Whirlpool has a narrow and decent moat which allows them to compete in the long run, but its moat has a real risk of being eroded in the future. I would rate its moat a 3/5 rating, because their competitive advantages can be replicated and are not insurmountable.

Risks to the Moat and Business Resilience

Several risks could harm Whirlpool’s business and moat:

  • Technological Disruption: The home appliance industry is evolving rapidly, with the rise of smart appliances and integration with home automation systems. If Whirlpool fails to keep up with these developments or a competitor gains an advantage in technology, they could lose their competitive edge.
  • Commodity Price Volatility: The prices of raw materials (steel, aluminum, plastic) used in appliance manufacturing are subject to fluctuations, which can impact profit margins and increase their costs. Whirlpool may not be able to pass on such cost increases, putting their revenue and profitability at risk.
  • Intense Competition: The home appliance industry is extremely competitive, with multiple players battling for market share. These factors limit pricing power and lead to eroding profit margins.
  • Emerging Markets Instability: While emerging markets represent an important growth opportunity for Whirlpool, these markets are more exposed to political, economic, and social risks that could negatively impact the company’s business and profits.
  • Consumer Sentiment: If consumer sentiment becomes more negative, particularly in developed markets, sales can fall. The purchase of home appliances is directly linked to the overall financial health and consumer confidence, meaning they can decline rapidly during an economic downturn.
  • Evolving Distribution Channels: As retail changes, with increased importance on online sales, or direct to consumer selling, Whirlpool may need to adapt their business model, which has the potential of causing distribution problems, inefficiencies, and decreased sales.
  • Given the changing market dynamics and aggressive moves of competition, it is important for Whirlpool to protect their long-term financial stability. It is also important for their business to continue innovating and creating competitive advantages in this new landscape.

Understandability: 2/5

Whirlpool is a relatively complex business, making it difficult to fully understand:

  • Global Operations: Their large global operations make it difficult for an average investor to understand the business and the various local market pressures. Their multiple geographic segments also imply different consumer preferences, different distribution channels, and different risk factors.
  • Multiple Brands: They have an extensive brand portfolio and their brands sell different types of products. These brands have their own specific customer base, with different brand loyalty. It can be difficult to understand the exact impact on financials due to their different brand offerings.
  • Financial Complexity: The company’s financials can be complex to interpret, given a mix of debt, derivatives, goodwill, impairment charges, and different accounting standards in various countries.
  • Acquisitions: Many of their acquisitions makes it difficult to estimate the intrinsic value of their business, because their growth includes acquisitions that are hard to value and compare.

Given these complexities, understanding Whirlpool’s business can be difficult and requires a deep understanding of its operations and financials, including its competitors. I would rate its understandability a 2/5.

Balance Sheet Health: 3/5

Whirlpool’s balance sheet is relatively sound but shows some areas of concern:

  • Leverage: The company carries a fairly large amount of debt, though, but has a steady flow of cash. Debt needs to be used smartly to achieve better returns, because a highly leveraged capital structure can be very costly during high rates. Also debt can lead to increased risk in times of uncertainty.
  • Tangible assets: The company relies heavily on intangible assets, which can easily be depreciated or written down, potentially leading to losses in the future.
  • Liquidity: The company holds a reasonable level of cash and cash equivalents. Current assets are greater than current liabilities and there is nothing worrisome about the short-term. However, cash needs to be managed correctly to make the company profitable.

Although the balance sheet is not disastrous, it can use some improvements to strengthen it, particularly by reducing debt and focusing on growth and ROIC. Overall, I would give it a 3/5 rating.