While Whirlpool markets its products in nearly every country throughout the world, approximately 49% of 2018 sales were derived from the U.S. Whirlpool operates via four business segments:
- North America: 54% of 2018 sales
- Europe, Middle East and Africa: 22% of sales
- Latin America: 17% of sales
- Asia: 7% of sales
- Premium brands (15% of sales): KitchenAid, Jenn-Air
- Mass market brands (75% of sales): Whirlpool, Maytag
- Value brands (10% of sales): Indesit, Amana
In developed regions such as North America and Europe, which combine for more than 70% of Whirlpool's revenue, the home appliance market is mature since population growth rates are so low.
As a result, Whirlpool enjoys substantial replacement sales since many consumers often replace worn out appliances with the same brand in order to match the other appliances in their house. Therefore, as long as the company's product lineup remains competitive, Whirlpool's large installed base should remain a major cash cow.
Whirlpool invests $1 billion annually into capex and R&D to ensure its appliances stay aligned with evolving consumer preferences. A strong cadence of product innovation helps Whirlpool maintain its entrenched market position by pleasing customers and building brand loyalty for repeat purchases.
Long an industry leader in incorporating new technologies (touch screens, voice controls, etc) into its products, Whirlpool is now bringing to market some of the first home appliances connected to the internet and to each other.
Connected devices can be integrated with smart home systems like Amazon's Alexa and Google's Nest to offer consumers increased convenience and efficiencies while also creating potential for Whirlpool to sell high-margin bundled subscription services in the future.
In addition to its product innovation, Whirlpool also gains advantages from its leading global scale. This provides the company with relatively low costs to manufacture and distribute its appliances, an important advantage in the competitive and low-margin household appliances industry.
Altogether, management expects that its investments, along with Whirlpool's strong economies of scale, will allow the business to achieve modest organic sales growth of about 3% annually and margin expansion in the coming years.
Over the long term, it's hard to imagine this mature, cyclical industry's growth exceeding a low single-digit rate. After all, demand for household appliances is largely tied to the economy, housing market, and overall population growth. Already the giant in the industry, Whirlpool seems unlikely to grow at a much faster pace.
However, while Whirlpool is an industry leader, there are plenty of risks that income investors need to be aware of before investing.
This sensitivity to the economy explains why management targets such a low EPS payout ratio (30%) for its dividend and also why the company has gone many years between dividend increases in the past.
In other words, while Whirlpool's dividend appears to be safe due to management's financial conservatism, investors can't expect clockwork-like annual payout increases from the company.
More importantly, while Whirlpool undoubtedly has several competitive advantages and has been conservatively managed to ensure it has staying power for the long term, the business gives us a "best house in a bad neighborhood" feeling.
The household appliance industry's operating margins around the globe are rather abysmal, averaging near 1%. With the exception of Europe, the Middle East, and Africa, the company's profitability around the world is much better than the industry average.
At the same time, Whirlpool is far from immune to the perpetual challenges the industry faces, including volatile raw material and freight costs, capital-intensive manufacturing processes, price-sensitive consumers, and cyclical demand trends.
Consumers are becoming more informed shoppers as well. Ten years ago, newspaper ads were the No. 1 source for consumers when they looked for information about an appliance to buy, according to management. Today, it's almost all digital as consumers research competing appliance brands online before making a purchase.
In other words, Whirlpool must continue differentiating its products with the right investments in innovation and distribution (e.g. e-commerce) if it wants to maintain its leading market share positions and above-average profitability.
Whirlpool's financial results in any given quarter or year are also exposed to currency risk due to the firm's global presence (51% of sales are from outside the U.S.). If the U.S. dollar appreciates against local currencies, then the company's products become more expensive and less competitive in foreign markets, where the firm doesn't have a local manufacturing presence.
Overall, though, we expect Whirlpool's long-term earnings power to be influenced primarily by the industry's mature and cyclical nature and not by short-term headwinds like exchange rate fluctuations or even trade conflicts.