September 13, 2011

Whirlpool Corporation 

 

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Long-term Objectives 

In our view, the difficult near-term outlook does not reflect the long-term term fundamentals for WHR or 

its industry. Clearly, a recovery to more normalized conditions and profitability could require a multi-year time 

frame. However, the negative sentiment and weak results mask the true underlying earnings power and cash 

flow generation potential for this business. Moreover, management has taken several previously mentioned 

steps (cost reduction, manufacturing efficiency improvements, etc.) that should position the Company for 

profitability that could potentially exceed historical levels.  

Management has outlined the following benchmarks for long-term creation of shareholder value. In 

addition, the Company has also set specific goals for WHR to achieve by 2014. Although the timing of a 

recovery is never certain, we believe these goals represent reasonable long-term objectives in a normalized 

environment. However, it is important to note that our valuation of the stock incorporates more modest 

assumptions. 

2014 Objectives 

Long-term Benchmarks 

$24 billion in revenue 

5%-7% annual revenue growth 

8% operating margin 

10%-15% annual EPS growth 

EPS of at least $15.00 

4%-5% free cash flow: sales ratio 

 

Assuming the above objectives are attainable in a more favorable market environment, they would 

imply annual EBITDA of about $2.2 billion and approximately $1 billion in free cash flow per year. This free 

cash flow projection is well above the $400-$500 million expected in 2011, and would imply a free cash flow 

yield over 20% based on Whirlpool’s current market capitalization.   

Long-term Growth Drivers 

In our view, there are several significant drivers of profit growth for WHR over the long-term. The most 

obvious growth driver should remain a return to normalized conditions in the housing market and overall 

economy in North America (still representing over 50% of total Company revenue). Absent such a recovery, 

WHR’s long-term financial objectives would be difficult to achieve, and the Company’s true earnings power 

would likely remain unrealized. However, we believe some normalization in housing market conditions is likely 

to occur during the coming years. 

An additional potential driver of long-term growth is Company efforts to increase share and extend 

product lines into adjacent businesses. For example, WHR’s market share position within laundry appliances 

currently stands at over 50%, but kitchen appliance share is below 40%, and management sees meaningful 

opportunities to close that gap (through products such as microwaves and freezers). In addition, an extension 

into adjacent categories (portable appliances, parts & service, water purifiers, etc.) also represents a potential 

source of new sales. Management believes the combined effect of a market recovery paired with market share 

gains represents a $1 billion revenue opportunity (over a 5% boost from current sales levels).  

From our perspective, this opportunity for $1 billion in additional revenue should be attainable. During 

the coming years, issues such as household formation, population growth, and the drastic reduction in housing 

starts argue for a more normalized market environment in North America. In addition, WHR’s disciplined capital 

investment throughout the cycle should position the Company for market share gains (capital expenditures 

have remained above $500 million since 2006). This level of Company investment should ensure that WHR 

products continue to differentiate themselves through their technology and innovation. Moreover, investments 

in its manufacturing, and its focus on overall efficiency should enhance WHR’s competitiveness from a cost 

perspective.  

The growth and importance of WHR’s emerging markets presence is another key growth driver. Within 

the next 5 years, international markets are expected to represent at least half of overall Company sales (up 

from 47% in 2010). Importantly, nearly 70% of that international business will likely be derived from emerging 

markets (WHR has #1 market share in Latin America and #2 share in India). According to a U.S. State 

Department report, there are now more than 50 million Indians who are classified as “middle class,” and the 

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Whirlpool Corporation 

 

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Indian middle class is projected to increase ten-fold by 2025. Within Latin America, WHR’s primary exposure is 

through Brazil. Within Brazil, the middle class population increased by 24% during the 2005-2009 period alone 

(source: Brazil Census Bureau), and the growth of the middle class is expected to remain robust for the 

foreseeable future.  

The growth of middle class populations within emerging markets should bode well for appliance 

demand, and sales of WHR products. The worldwide appliance market is current valued at approximately 

$120 billion. This market should enjoy a healthy growth profile as utilization of appliances within emerging 

markets grows and begins to approach levels currently seen in developed markets such as the United States 

and Western Europe (see chart below). 

 

Source: Company presentation, March 9, 2011 

 

Balance Sheet and Financial Position 

Despite facing a challenging market environment, WHR has successfully maintained profitability and 

relatively healthy cash flow throughout recent years. During this period of weakness, WHR has made 

significant progress with its cost structure and has maintained a solid balance sheet. During 2010 alone, WHR 

paid down $400 million in debt. As of the most recent quarter, Whirlpool had a net debt: capital ratio of 27% 

and total debt of about $2.5 billion. Although near-term results are weak, the current level of interest expense 

(approximately $220 million) should be comfortably covered by company cash flow (We expect WHR to 

generate over $1 billion in EBITDA during 2011). However, it should be noted that WHR’s bond ratings have 

been downgraded in recent years in response to the difficult industry conditions. WHR continues to have 

investment grade bond ratings from the major agencies (S&P BBB-, Moody’s Baa3), and these ratings were 

reaffirmed following the recently announced $600 million settlement with Banco Safra. Management has listed 

improved bond ratings as among its top financial priorities during the coming years.  

Given WHR’s relatively resilient cash flow, the Company has been able to address its funding needs 

throughout the downturn. Whirlpool has maintained a fairly steady investment in capital spending throughout 

the economic cycle. During 2010 the Company had $593 million in capital expenditures and $516 million in 

R&D, and capital spending has remained above $500 million since 2006. In addition, the Company has 

allocated some of its excess cash flow to addressing its pension obligations (a $300 million contribution has 

been budgeted for 2011). Going into 2011, WHR’s overall pension obligations were underfunded by 

$1.5 billion. 

WHR’s dividend has been maintained throughout the downturn, and was actually increased 16% 

earlier this year to an annual payment of $2.00 per share (a dividend yield of over 3%). Based on EPS 

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