Condor Capital has recently initiated a position in Whirlpool Corporation (WHR) in some of its clients’ portfolios. Whirlpool is the largest home appliance manufacturer in the world, with a portfolio of brands that includes Whirlpool, Maytag, KitchenAid, Brastemp and Consul.
Of late, some investors have become less enthusiastic about the prospects for a continued recovery in the housing market due to a variety of reasons. Some of these include higher mortgage rates and a dearth of first-time home buyers, as many younger prospective buyers have felt pressure from higher student loan burdens. Some of these fears were reinforced as momentum in the housing market ebbed early this year. However, we feel that much of this can be attributed to harsh weather as well as a pause while buyers adjusted to higher mortgage rates. Bolstering this stance, recent data showed that sales of new single-family homes jumped 18.6% in May to 504,000, the highest since April 2008. With that said, we believe that the recovery is still in the early innings and may have the potential for several years of above trend growth.
Despite the bounce back in housing starts over the last few years, the current rate of construction is below the level needed to satisfy demand implied by population growth and demolition of older homes. We feel that this shortfall will eventually be filled as the job market has improved in recent years. In our view, it is reasonable to expect that there would be a lag between labor market improvement and increases in first-time home purchases as buyers accumulate the funds necessary for a down payment. Additionally, after severely overcorrecting in the depths of the recession, credit underwriting standards have loosened to a degree. In fact, according to Fannie Mae’s National Housing Survey, the number of people who believe it is easy to get a mortgage increased to 52% in March, one of the highest levels on record. Looking forward, credit availability could continue to improve as Federal regulators recently expressed an interest in making more credit available via Fannie Mae and Freddie Mac, a sharp turnaround from previous predictions that the Government-sponsored enterprises (GSEs) would be wound down.
Aside from new home purchases, declines in the number of borrowers that are underwater on their mortgages and a strong equity market have improved the fiscal balance sheets of many consumers. This not only improves the ability for homeowners to move, but may also spur additional spending on upgrades and improvements to their current homes. As the world’s largest maker of home appliances with a broad portfolio of offerings at a wide range of price points, Whirlpool is well positioned to capitalize on both of these trends.
Remodeling on the Rise
As economic stability has increased in the United States since the Great Recession, consumers have taken advantage of low interest rates and rebounding home prices in order to remodel their homes. Permits for remodeling jobs rose 5.1% last year from 2012, according to the permit–tracking company BuildFax. This trend is forecasted to continue into 2014 as The National Association of Home Builders predicts that homeowners will spend $122.8 billion on home remodeling this year, up 3.1% from a year ago. As the maker of several well-known brands, Whirlpool is poised to benefit from these developments as consumers increase their purchases of small and large appliances alike.
Supply Chain Enhancements
In the home appliance industry, where manufacturing costs comprise a significant portion of a company’s overall expenses, productivity and supply chain efficiency are major factors that determine overall profitability. Over the past few years, Whirlpool has consistently succeeded in these areas. For instance, by optimizing the locations of its production facilities with its suppliers and customers, Whirlpool managed to cut 40 million travel miles between its facilities. As a product of this, the company managed to reduce its fuel costs, minimized its environmental impact, and cut damage to its products in transit by 50%. Further, through various additional enhancements, it has improved warehouse uptime to more than 90% – en route to its ultimate goal of 99.9%. In January, Whirlpool also announced that it will move some of its washing-machine production capabilities from Mexico to Ohio as it expects demand for its products to increase in the United States. Finally, in response to the expansion of apartment construction and increase in demand for compact living in the U.S., Whirlpool has invested $40 million to double the size of another manufacturing plant in Ohio so that it can produce a variety of smaller appliances.
Lately, improving economic trends have been driving consumers to increase discretionary spending for items such as appliances. As this rebound is still in its infancy compared to pre-recession norms, we believe that Whirlpool is positioned for further growth due to a solid portfolio of offerings and an efficient supply chain. In addition to these macro tailwinds that portend well for its future growth potential, Whirlpool sports an attractive valuation and has returned cash to shareholders via stock buybacks and increased dividends. All told, we believe this name is a solid investment for long-term investors.