Whirlpool To Gain From Growth Initiatives, But Risks Persist

Whirlpool Corporation WHR has been gaining momentum lately on the back of its stringent focus on long-term goals for 2020, innovation strategy as well as global cost-based pricing and fixed cost reduction strategies. However, higher raw material inflation and lower volumes remain impediments.

Long-Term Goals: A Key Growth Driver

Whirlpool is gaining significantly from its commitment toward long-term goals supported by its robust product pipeline, solid innovations and cost productivity initiatives. Also, the company has outlined significant long-term targets through 2020 driven by brand strength and product portfolio.

Through 2020, Whirlpool aims to deliver organic revenue growth of 3-5% annualy. Moreover, the company targets EBIT margin to exceed 10% by 2020 and envisions earnings per share to grow by 10-15% each year. By 2018, it anticipates free cash flow generation of 5-6% of revenues.

Cost-Productivity Programs Aid Margins

Whirlpool is striving to improve margin through several measures including cost-based price increments and cost-reduction initiatives, which should also boost business efficiency. The company recently introduced global cost-based pricing for its trade customers in order to mitigate raw material inflation. Furthermore, it is on track with initiatives to cut down fixed overhead expenses by $150 million, which will add to the company's ongoing cost productivity program.

Also, Whirlpool's focus on boosting consumer demand has increased global price/mix by 50 basis points (bps) in fourth-quarter 2017. This marked the company's first quarter of positive global price/mix since fourth-quarter 2015.

In 2018, Whirlpool's positive global price/mix along with significant progress on cost-saving initiatives is likely to result in margin expansion. Additionally, the company's renewed focus on inventory management is expected to boost earnings and free cash flow going forward.

Innovation Driving Growth

Whirlpool is among one of those companies that have successfully implemented its innovation strategies into the business model. It invests heavily in technologies to produce differentiated products to suit the needs of their end consumers. Also, the company is keen on boosting revenues at its core appliance business through expansions and investments. This, in turn, is expected to fuel growth of its high-margin categories.

Bottom Line

While all seems well with Whirlpool, it has been suffering from soft top-line performance and higher raw material inflation. Notably, the company's top line has lagged estimates for three straight quarters now. Moreover, Whirlpool's operating performance continues to be impacted by raw material cost inflation and unit volume declines. This caused adjusted operating margin to contract 70 bps in the preceding quarter.

Though the company expects improved global price/mix and cost savings to benefit margins in 2018, this is likely to be more than offset by continued raw material inflation. In 2018, Whirlpool aniticipates the combined 125 bps margin improvement from favorable price/mix, fixed cost reduction and improved cost productivity, to be more than offset by nearly $200-$250 million increase in raw material inflation from the prior year.

Nonetheless, Whirlpool's ongoing strategic initiatives and cost savings program provide visibility for growth in the future.

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