Longbow Turns Bullish On Whirlpool, Says Stock Erroneously Priced For 'Substantial' Earnings Deterioration

Appliance manufacturer Whirlpool Corporation WHR exited the first quarter with some momentum that could translate to a "strong period" of earnings acceleration, according to Longbow Research. 

The Analyst

David Macgregor upgraded Whirlpool from Neutral to Buy with a new $178 price target.

The Thesis

Longbow's neutral view on Whirlpool was based in part on the thesis that the company's first quarter poses the biggest risks for the year, Macgregor said in the Friday upgrade note. (See his track record here.) 

Encouragingly, the company issued a better-than-expected report highlighted by better pricing and a favorable mix, the analyst said. 

Whirpool's momentum in the first quarter could expand in the second quarter on the basis of improving incremental unit margins, which translate to better pricing, Macgregor said. Whirlpool should also benefit from improving raw material costs and consumers opting to choose higher-priced products, he said. 

The bullish case for Whirlpool is based on the company's shareholder-friendly returns, including around $200 million in share repurchases for the full year and a dividend of around $300 million, the analyst said.

"This leaves room for a substantial deleveraging of up to $300-$400 million." 

Whirlpool shares are trading at a multiple of less than 10 times the low end of 2019 EPS guidance of $14-$15, which prices the stock for a "substantial" earnings deterioration, Macgregor said. This "overly bearish sentiment" may not be justified given multiple catalysts and encouraging trends ahead, he said. 

Price Action

Whirpool shares were down 2.05 percent at $131.08 at the time of publication Friday. 

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