What a fantastic six months it’s been for Whirlpool. Shares of the company have skyrocketed 40.9%, setting a new 52-week high of $124.72. This run-up might have investors contemplating their next move.
Is now the time to buy Whirlpool, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.Despite the momentum, we're cautious about Whirlpool. Here are three reasons why there are better opportunities than WHR and a stock we'd rather own.
Why Do We Think Whirlpool Will Underperform?
Credited with introducing the first automatic washing machine, Whirlpool (NYSE:WHR) is a manufacturer of a variety of home appliances.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Electrical Systems company because there’s a ceiling to what customers will pay.
Over the last two years, Whirlpool’s units sold averaged 1.3% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Over the last few years, Whirlpool’s ROIC has decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Whirlpool’s $8.08 billion of debt exceeds the $1.08 billion of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $1.04 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Whirlpool could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Whirlpool can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping their customers, but in the case of Whirlpool, we’re out. After the recent rally, the stock trades at 9.9× forward price-to-earnings (or $124.72 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at Google, whose cloud computing and YouTube divisions are firing on all cylinders.
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