Throughout the beloved time-traveling movie franchise Back to the Future, the scientific genius undergirding the plot repeatedly admonishes the protagonist to think fourth dimensionally; that is, to account for the passage of time that will ultimately affect the visible and tangible three-dimensional world. It’s this holistic thought process that supports the contrarian case for appliance manufacturer Whirlpool (NYSE:WHR). I am bullish on WHR stock.
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On paper – which is to say three-dimensional thinking – investors have every reason to run away from Whirlpool. Frankly, the company has only a few things going right for it. For instance, on a year-to-date basis, WHR stock dropped by slightly over 36.5%. Also, during a time when several publicly-traded securities bounced higher in the second half of the year, WHR still trades below parity.
Fundamentally, fears of an imminent global recession clouded market sentiment. To be sure, WHR stock aligns with the durable goods segment. As such, the underlying business represents a necessity. At the same time, the durability of common household appliances – refrigerators, washing machines, etc., poses challenges. Basically, no one regularly buys new appliances, limiting revenue prospects.
Further, even if the consumer needed to buy Whirlpool appliances, another obstacle exists – deteriorating consumer sentiment. The combination of reduced personal savings and skyrocketing credit card debt implies that people won’t spend unless they absolutely must. That’s not exactly a comforting narrative for WHR stock.
Nevertheless, fourth-dimensional thinking could be the surprisingly-bullish ticket for Whirlpool.
Focus on the Time Component of WHR Stock
As durable goods, arguably, most folks don’t think about their appliances until they break. By simply following logical deduction, investors will realize that this “breaking point” will arrive sooner than later. Therefore, WHR stock, in its present malaise, may be a discounted opportunity for the future.
Generally speaking, common household appliances last several years. Refrigerators, dishwashers, and washing machines usually last around seven years. An oven can last over 10 years, and something as ubiquitous as microwaves last about six years. These stats are based on expectations for normal usage.
However, there was nothing normal about the new normal. Most consequentially for WHR stock, employers sent millions of white-collar workers to operate remotely. In turn, demand for everyday appliances shifted from the office to the home. Ultimately, this massive transition will inevitably translate to far greater wear and tear than appliance manufacturers anticipated.
Let’s face facts: no economic point exists in making a product more resilient than it needs to be. In the case of companies like Whirlpool, its engineers likely benchmarked product durability based on normal usage, specifically normal for the pre-pandemic paradigm where people mostly commuted to work.
Now, with roughly two years of work-from-home privileges, household appliances incurred far greater wear and tear than expected. Further down, this should benefit WHR stock as it might make more sense to replace appliances than to repair them.
Although this narrative doesn’t guarantee a huge demand influx for 2023, what it does is push up the replacement schedule. For instance, if an appliance were to break in 2025 under normal conditions, it might break in 2023 due to increased usage because of the pandemic. Thus, it’s worth keeping tabs on WHR stock.
Is WHR Stock Worth Buying, According to Analysts?
Turning to Wall Street, WHR stock has a Moderate Sell consensus rating based on zero Buys, three Holds, and two Sell ratings. The average WHR price target is $130.40, implying 8% downside potential.
Takeaway: An Underappreciated Gem
If the wear-and-tear angle seems farfetched for WHR stock, investors may also want to look at the underlying financials. If the market is headed toward a recession, an idea like Whirlpool will likely make more sense.
For one thing, the company features a Shiller price/earnings ratio of 11.1 times. In contrast, the median value for the underlying industry is 17.6 times. Further, its enterprise-value-to-revenue ratio is 0.56 times, favorably lower than the sector median of 0.9 times.
To be fair, WHR stock features only middling strength in the balance sheet. For example, its Altman Z-Score is 2.58, which reflects some bankruptcy risk in the next two years. However, Whirlpool makes up for this with its outstanding three-year book growth rate of 31.9%. Also, on the bottom line, its operating margin is 7.85%, ranked better than 60.5% of the competition.
Finally, Whirlpool delivers the goods in terms of passive income. At writing, its forward yield is 4.94%, far higher than the consumer discretionary sector’s average yield of 1.89%. Therefore, anyone looking to go off the beaten path during these uncertain times should consider WHR stock.
