September 13, 2011

Whirlpool Corporation 

 

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expectations for the next 1-2 years, this represents a dividend payout ratio of less than 25%, and further 

underscores the security of future dividends. In terms of future free cash flow priorities, management ranks its 

priorities as follows: 1) fund the business (Capital Expenditures and Pension Funding), 2) maintain the 

dividend, and 3) repay debt. Once those issues are sufficiently addressed management may also consider 

share repurchase, selective M&A, and a potential dividend increase. WHR’s board of directors authorized a 

$500 million share repurchase program in 2008, but it has not been utilized for over 2 years. The unused 

portion of the share repurchase authorization stands at $350 million.  

Corporate Governance 

WHR has made several meaningful improvements to its corporate governance practices during recent 

years. The Company has eliminated its poison pill, supermajority voting provisions in its certificate of 

incorporation, and classified board structure. Currently, of the 14 board members, 12 are independent (non-

employees). CEO Jeff Fettig has held the Chairman of the Board position since 2004. The overall level of 

insider ownership is low (under 1%), however we are encouraged by several insider purchases of the stock, 

serving to underscore the stock’s attractive valuation. During August of 2011 alone, three Company officers 

invested a combined $438,000 in WHR shares (at an average price of $58.48). Like most firms, WHR utilizes 

stock options are part of its incentive compensation. During 2010, WHR recorded $29 million in share-based 

compensation expense. As of the end of last year, there was $44 million in unrecognized compensation related 

to non-vested stock options and stock unit awards.  

Valuation 

WHR shares have come under significant pressure during recent years, reflecting the multiple 

challenges impacting the Company’s fundamental outlook. Certainly, overall market and industry 

considerations related to issues such as weak housing conditions and cost pressures from raw material costs 

have served to negatively impact financial results, valuation, and overall investor sentiment. Taking these 

factors into consideration, it should create little surprise that stock performance has been very disappointing. 

WHR shares have declined approximately 40% just since the beginning of 2011, the stock is down nearly 50% 

from highs achieved as recently as Spring-2010, and there is roughly a 14% short interest. Investors who 

exclusively focus on the near-term challenges will likely conclude that WHR’s valuation and share performance 

are warranted. However, we believe the stock presents a very attractive opportunity for patient investors with a 

longer-term time horizon.  

Assuming that conditions for the economy and the housing market can approach a more normalized 

state during the next 2-3 years, WHR should be well positioned to achieve a meaningful recovery in terms of 

both profitability and stock performance. In addition to having improved housing fundamentals and improved 

consumer sentiment as positive catalysts for product demand, WHR should also realize meaningful cost 

benefits from multiple sources. Company restructuring and cost reduction initiatives have already achieved 

meaningful progress, and should have positive long-term ramifications for margins. Moreover, near-term profits 

have been pressured by historic increases in raw materials costs, which we believe may prove to be 

unsustainable from a multi-year perspective. Importantly, we would also highlight that WHR has continued to 

invest in its businesses throughout the downturn, while maintaining its healthy dividend (yield over 3%), and an 

investment grade balance sheet.  

For the purposes of estimating intrinsic value, our valuation utilizes an EV/EBITDA methodology. In our 

view, this represents a more reliable means of valuation relative to earnings, especially given the uncertain 

impact of tax credits on WHR’s future net income. As previously mentioned, management has outlined fairly 

ambitious financial benchmarks for the 2014 time period, which could represent a potentially achievable 

scenario during a more favorable market environment (see Long-term Objectives section). However, we prefer 

to utilize a more conservative set of assumptions in order to value WHR shares.  

In order to estimate an intrinsic value for WHR in 2-3 years, we have assumed WHR can trade at 

5.0x EV/EBITDA, a multiple that is toward the lower end of the stock’s historical trading range. For the 

purposes of valuation, our intrinsic value estimate also assumes WHR can achieve about $21.5 billion in 

revenue and a 6% operating margin (implying EBITDA of about $1.9 billion, and free cash flow of roughly 

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Whirlpool Corporation 

 

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$900 million) by 2014. This level of revenue assumes a 10% shortfall relative to management’s 2014 objective, 

and assumes only a 10% improvement from very depressed 2011 sales levels. Moreover, our operating margin 

implies a 200 basis point shortfall relative to WHR’s 2014 goal, and assumes only a modest improvement from 

pre-recession levels of profitability. Overall, these multiple and profit assumptions produce an intrinsic value of 

$84 for WHR shares, and this may prove to be conservative. This intrinsic value, combined with the current 

dividend yield of over 3%, implies total return potential of over 60% from the current price. Importantly, we have 

assumed no additional pension contributions beyond 2011, implying a $1.2 billion pension shortfall (See below 

for breakdown).  

Whirlpool Valuation Summary 

  

Value 

  

($MM) 

WHR @ 5x 2014 EBITDA 

 $ 9,325 

Net Debt 

(1,661) 

Underfunded Pension* 

(1,200) 

Equity Value 

$ 6,464 

Shares Outstanding 

76.8 

Estimate of Intrinsic Value (Per Share) 

$84.17 

* reflects 2011 contribution only 

  

 

Higher levels of growth and profitability (at or closer to WHR’s objectives) could yield a fair value for 

WHR that would be over 40% higher than our estimate of intrinsic value (see matrix below for sensitivity 

analysis). Moreover, the 5.0 EV/EBITDA multiple could also prove to be conservative given that it is toward the 

lower end of historical ranges (WHR has traded at 6.0x EV/EBITDA or higher at certain times in the past).   

     

  

Intrinsic Value Matrix 

    

 

Assumed EV/EBITDA 5.0x 

    

Sales  20,000

20,500

21,000

21,500

22,000

22,500

23,000

23,500

24,000

Operating Margin 

4.5%

 

 $58.78 

 $60.24 

 $61.71   $63.17 

 $64.64 

 $ 66.10   $67.57 

 $69.03 

 $ 70.49 

5.0% 

 $65.29 

 $66.91 

 $68.54   $70.17 

 $71.80 

 $ 73.42   $75.05 

 $76.68 

 $ 78.31 

5.5% 

 $71.80 

 $73.59 

 $75.38   $77.17 

 $78.96 

 $ 80.75   $82.54 

 $84.33 

 $ 86.12 

6.0% 

 $78.31 

 $80.26 

 $82.21   $84.17 

 $86.12 

 $ 88.07   $90.03 

 $91.98 

 $ 93.93 

6.5% 

 $84.82 

 $86.93 

 $89.05   $91.17 

 $93.28 

 $ 95.40   $97.51 

 $99.63   $101.74 

7.0% 

 $91.33 

 $93.61 

 $95.89   $98.16   $100.44   $102.72   $105.00   $107.28   $109.56 

7.5% 

 $97.84   $100.28   $102.72   $105.16   $107.60   $110.05   $112.49   $114.93   $117.37 

8.0%  

 $104.35   $106.95   $109.56   $112.16   $114.77   $117.37   $119.97   $122.58   $125.18 

 

In our view, WHR shares represent a compelling opportunity for patient long-term investors to 

participate in a recovery in the housing market. Our price target utilizes relatively modest assumptions, and 

evaluates the Company on an independent, stand-alone basis. However, additional upside from other sources 

also warrants mention. From our perspective, WHR could eventually attract the attention of private equity 

investors given its strong brands, steady cash flow, and solid balance sheet. Appliance makers have been the 

focus of such investors in the past. Prior to WHR’s acquisition of Maytag in 2006, Maytag had attracted the 

interest of multiple private equity firms (In addition to the WHR bid, 2 private equity groups made formal bids for 

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Whirlpool Corporation 

 

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Maytag). After multiple bids for Maytag from several sources, WHR ultimately purchased the firm for $21 per 

share (equating to about 8.0x on an EV/EBITDA basis). We would also highlight Bain Capital’s 2007 purchase 

of American Standard’s bath and kitchen unit as another illustration of past investor interest in this industry 

(purchased for over 0.70x sales). These past transactions would suggest a fair value of approximately 

$150 per share for an acquisition of WHR, but we regard such multiples as unrealistic for the foreseeable 

future given current market fundamentals. 

Conclusion 

In summary, we regard WHR as an attractively valued means of participating in a future housing 

market recovery. The Company’s leading market share position, globally recognized brands, and strong 

distribution capabilities should ensure that Whirlpool retains a solid competitive position over the long-term. 

Moreover, growth opportunities associated with potential market share gains, extension of product lines, and 

increasing exposure to emerging markets should serve to further bolster WHR’s potential cash flow generation 

and earnings power. Consistent investment in R&D throughout the downturn should continue to support 

product quality and innovation. Additionally, management’s initiatives related to cost reduction and 

manufacturing efficiency during the downturn should translate to higher margins and profits as market 

conditions improve.  

We believe WHR’s valuation and potential recovery in profitability offers compelling long-term upside. 

Our $84 estimate of intrinsic value, combined with a dividend yield of over 3%, implies a total return of over 

60% during the next 2-3 years. This valuation utilizes relatively modest assumptions from a long-term 

perspective, and these assumptions could prove conservative. Our investment thesis is solely based on WHR 

remaining an independent, stand-alone entity. However, WHR’s overall strategic and financial profile could 

attract the attention of private equity investors at some point in the future. Ultimately, WHR is an out-of-favor 

stock in an out-of-favor industry. Although near-term results may remain challenging, we believe the stock’s 

depressed valuation and poor sentiment translates to an attractive investment opportunity for patient investors 

with a multi-year time horizon.  

 

 

 

Risks: 

Risks that Whirlpool may not achieve our estimate of the Company’s intrinsic value include, but are not 

limited to, a lack of recovery in housing fundamentals, a persistent increase in materials costs, a substantial 

slowdown in growth within emerging markets, and a general failure by management to maintain and improve 

the Company’s strategic and financial position. 

Analyst Certification: 

Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal 

views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our 

analysts’ compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this 

report. 

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Whirlpool Corporation 

 

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WHIRLPOOL CORPORATION  

CONSOLIDATED BALANCE SHEETS  

(in millions)  

ASSETS  

(Unaudited)

June 30, 2011

December 31, 2010

Current assets  

 

 

Cash and equivalents  

$      845  

$   1,368  

Accounts receivable, net  

2,455  

2,278  

Inventories  

3,071  

2,792  

Deferred income taxes  

182  

204  

Prepaid and other current assets  

   662  

   673  

Total current assets  

7,215  

7,315  

Property, net of accumulated depreciation  

3,213  

3,134  

Goodwill  

1,729  

1,731  

Other intangibles, net of accumulated amortization  

1,780  

1,789  

Deferred income taxes  

1,633  

1,305  

Other noncurrent assets  

344  

310  

TOTAL ASSETS  

$ 15,914  

$ 15,584  

LIABILITIES AND STOCKHOLDERS’ EQUITY 

 

 

Current liabilities  

 

 

Accounts payable  

$  3,827  

$  3,660  

Accrued expenses  

1,262  

671  

Accrued advertising and promotions  

312  

426  

Employee compensation  

386  

467  

Notes payable  

15  

2  

Current maturities of long-term debt  

363  

312  

Other current liabilities  

   704  

   611  

Total current liabilities  

6,869  

6,149  

Noncurrent liabilities  

 

 

Long-term debt  

2,143  

2,195  

Pension benefits  

1,312  

1,519  

Postretirement benefits  

465  

610  

Other noncurrent liabilities  

   626  

   791  

Total noncurrent liabilities  

4,546  

5,115  

Stockholders’ equity  

 

 

Common stock, $1 par value  

106  

106  

Additional paid-in capital  

2,184  

2,156  

Retained earnings  

4,617  

4,680  

Accumulated other comprehensive loss  

(687)  

(893)  

Treasury stock  

(1,822)  (1,823) 

 

Total Whirlpool stockholders’ equity  

4,398  

4,226  

Noncontrolling interests  

101  

94  

TOTAL STOCKHOLDERS’ EQUITY  

4,499  

4,320  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  

$  15,914  

$  15,584