Throughout the beloved time travel movie franchise Back to the future, the scientific genius behind the plot repeatedly urges the protagonist to think in the fourth dimension; that is, to account for the passage of time that will eventually affect the visible and tangible three-dimensional world. It’s this holistic thinking process that supports appliance maker Whirlpool’s opposite case (NYSE: WHR). I am bullish on WHR stocks.
On paper — that is, three-dimensional thinking — investors have every reason to shun Whirlpool. Frankly, the company has only a few things going well for it. For example, year-to-date, WHR’s stock has fallen just over 36.5%. Additionally, at a time when several publicly traded stocks rebounded in the second half of the year, WHR is still trading below parity.
Basically, fears of an impending global recession clouded market sentiment. Certainly, the WHR stock aligns with the durable goods segment. As such, the underlying activity represents a necessity. At the same time, the durability of common household appliances – refrigerators, washing machines, etc. – poses challenges. Basically, no one buys new devices on a regular basis, which limits revenue prospects.
Moreover, even if the consumer needed to buy Whirlpool appliances, another obstacle exists: the deterioration of consumer confidence. The combination of shrinking personal savings and skyrocketing credit card debt means people won’t spend unless they absolutely have to. That’s not exactly a comforting tale for WHR stocks.
Nonetheless, fourth-dimensional thinking might be the surprisingly optimistic ticket for Whirlpool.
Focus on the time component of the WHR stock
As durable goods, it’s safe to say that most people don’t think about their devices until they break. By simply following a logical deduction, investors will realize that this “breaking point” will come sooner rather than later. Therefore, the WHR stock, in its current malaise, may be a discounted opportunity going forward.
Generally speaking, common household appliances last for several years. Refrigerators, dishwashers and washing machines generally last about seven years. An oven can last over 10 years, and something as ubiquitous as microwaves lasts about six years. These statistics are based on expectations for normal use.
However, there was nothing normal about the new normal. More consequential for WHR stock, employers sent millions of white-collar workers to operate remotely. In turn, the demand for everyday devices has shifted from the office to the home. Ultimately, this massive transition will inevitably result in far more wear and tear than appliance manufacturers had anticipated.
Let’s face it: there is no economic interest in making a product stronger than it should be. In the case of companies like Whirlpool, its engineers likely rated product durability based on normal use, especially normal for the pre-pandemic paradigm where people primarily commuted to work.
Now, with about two years of work-from-home privileges, appliances have seen far more wear and tear than expected. Further down, this should benefit WHR stock as it might make more sense to replace devices than to repair them.
While this narrative does not guarantee a huge influx of demand for 2023, it does increase the replacement schedule. For example, if a device were to fail in 2025 under normal conditions, it could fail in 2023 due to increased usage due to the pandemic. Thus, it is worth keeping an eye on the WHR stock.
Is WHR stock worth buying, analysts say?
As far as Wall Street is concerned, WHR stock has a consensus moderate sell rating based on zero buy, three hold and two sell ratings. WHR’s average price target is $130.40, implying an 8% downside potential.
Takeaway: an underrated gem
If the attrition angle looks overdone for WHR stocks, investors may also want to examine the underlying financial data. If the market is heading into a recession, an idea like Whirlpool will probably make more sense.
For one thing, the company boasts a Shiller price-to-earnings ratio of 11.1 times. In contrast, the median of the underlying industry is 17.6 times. Additionally, its enterprise value to revenue ratio is 0.56x, favorably below the industry median of 0.9x.
To be fair, WHR stock shows only average strength on the balance sheet. For example, its Altman Z-Score is 2.58, which reflects some risk of bankruptcy over the next two years. However, Whirlpool compensates for this with its exceptional growth rate of 31.9% over three years. Moreover, on the net result, its operating margin is 7.85%, better ranked than 60.5% of the competition.
Finally, Whirlpool delivers the goods in terms of passive income. At the time of writing, its forward yield is 4.94%, well above the average Consumer Discretionary sector yield of 1.89%. Therefore, anyone looking to think outside the box in these uncertain times should consider WHR stock.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.