World’s Largest Appliance in the Spotlight

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World’s Largest Appliance in the Spotlight

By Richard Robinson, Ph.D., Equities Analyst

A class-action lawsuit against Whirlpool (WHR) came to an abrupt end last week.

Consumers had accused the company of selling faulty front-loading washing machines that accumulated mold.

After a three-week trial, the federal jury only deliberated for two hours before rejecting the case entirely.

It’s a huge win for Whirlpool, considering that similar cases against the appliance company are mounting up in other states.

Indeed, the company now expects the pending lawsuits to be rejected, as well. And shares have been trending upward slightly over the last few days.

But that’s not the only reason why investors are taking an interest in the stock.

Whirlpool’s Temporary Earnings Dip

On the morning of October 28, WHR dropped as much as 2.2%, to $154 per share, in pre-market trading.

The reason?

The company’s early-morning release reported earnings of $3.04 per share for the third quarter, which missed the Capital IQ Consensus Estimate by $0.09.

Investors responded quickly . . .  but they should have taken a closer look before taking action . . .

You see, after the Opening Bell, WHR shares rose steadily throughout the day as investors had a chance to digest the company’s latest quarterly results.

The company is actually showing improvement in several areas – despite the EPS miss!

For starters, third-quarter revenue rose by 3% to $4.8 billion, mostly on the back of North American sales that Whirlpool sees increasing 5% by year’s end.

And while third-quarter EPS results disappointed investors, the numbers were 11.8% higher than Q3 2013 results of $2.72 per share.

Meanwhile, the company reported a record-high Non-GAAP operating profit of $387 million (a 9.6% increase over the Q3 2013 profit of $353 million) and posted a record $230 million in net earnings – an increase of $34 million, or 17.3%, over the same quarter a year ago.

Finally, the company announced that it expects to end the year with $650 million to $700 million in free cash flow.

And after their early-morning dive, Whirlpool shares closed the day at $168.06, an increase of more than 6.7% over Monday’s closing price of $157.40.

Meanwhile, more than 2.7 million shares traded hands on the day, compared to the stock’s average volume of just over one million shares. And the stock has continued to trend upward this week.

Better yet, shares should continue their upward climb from here . . .

New Developments Promise to Drive Shares Higher

The company has announced a robust launch schedule for new products – including a ventless clothes dryer that uses the company’s Hybrid Heat Pump technology to reduce energy costs for consumers.

In addition, the company recently introduced an award-winning, water-recycling dishwasher and a resource-efficient refrigerator, which are designed to reduce resource consumption by 33% and 42%, respectively.

These product launches should boost the company’s earnings in the future . . .  and in the meantime, the company will benefit from some recent acquisitions.

For instance, Whirlpool’s recent acquisition of Italian appliance maker, Indesit (IND.MI), will provide significant gains in Europe, the Middle East, and Africa. The company expects the acquisition to be moderately accretive to 2014 free cash flow and meaningfully accretive to earnings in 2015.

Better yet, the company also acquired a 51% interest in the Asian appliance maker, Hefei Sanyo (600983.SS).

While the acquisition will negatively affect earnings in Q4 2014, Whirlpool expects the transaction to be accretive to the bottom line in 2015.

Today, Whirlpool is the world’s largest appliance maker, and with its acquisition of Hefei Sanyo, it now has a secure platform for growth in China.

At the end of the day, that means Whirlpool should be on every investor’s watch list.

Good investing,

Richard Robinson

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By Richard Robinson