Since Whirlpool hit a five-year low of $19.19 in March 2009, its stock's achieved an annualized total return of 59%, more than double the SPDR S&P 500 (NYSE:SPY), which gained 26% over those same 52 months. Believers of reversion to the mean will definitely see this as a danger sign. In their minds it's gone too far too fast and will need a cooling-off period. But that's just one point of view.
In the July 17 issue of the Globe and Mail, Ian McGugan looks at the concept of gross-profit-to-assets (GPA). He references a couple of people familiar with this relatively unknown method for selecting stocks. One of them, Robert Novy-Marx, is an associate professor of finance at the University of Rochester and believes that GPA, when compared to industry peers, is a better way of finding winning stocks than metrics like earnings or cash flow. Using the following criteria: (1) GPA ratio higher than peers, (2) gross profit increase over the past year, and (3) a positive change in the consensus analyst estimate over the past 90 days, McGugan came up with a list of 25 stocks. Whirlpool wasn't on it or any of its peers. Not to worry. In the table below I'll compare it to three of its nearest competitors based on market cap. This should provide a good indication whether Whirlpool's got more gas in the tank or not.
Whirlpool and Peers
Positive Earnings Revision
Past 90 Days
|Stanley Black & Decker (NYSE:SWK)||0.23||-2.4%||No|
Granted this is a small sample but the figures above send both positive and negative signals. In terms of GPA, Whirlpool delivers a gross-profit-to-assets ratio of 19%, 400 basis points lower than the average of its three peers. On the other hand, it grew its gross profit by 12.3% in 2012, 620 basis points better than the average of its peers.
Now, if we compare the four companies over the past five years, we get a slightly different picture. Whirlpool's average gross-profit-to-assets ratio over the past five years was 17%, 200 basis points lower than in 2012. Its peers also did better in 2012 with a GPA ratio 300 basis points higher than their average over the past five years.
Over the past four years, Whirlpool increased its gross profit by a cumulative 14.6%. Meanwhile, thanks to Textron falling out of bed, its peers averaged a cumulative decline of 2.7%, considerably worse than Whirlpool. However, if you take Textron out of the mix, Stanley Black & Decker and Parker-Hannafin grew by a cumulative 14.2%, only 60 basis points less than Whirlpool.
What Does It Mean?
It means that Whirlpool's 87% gain over the past 52 weeks is the market's way of rewarding the company for a job well done. Its Q2 results indicate it's a company on the rise. It now expects earnings per share as high as $10 in 2013, something it's never done. With a PEG ratio of 0.6 and a forward P/E ratio of 9.0, Whirlpool has PEG payback of just 5.2 years. This means that it will take just a little over five years to earn $128.91 per share. Any time you can do that you're in a great position.
There's no doubt Whirlpool's on the rise. It fought hard through the recession and housing crisis and has come out the other side in great shape. If it can get operating margins above 6%, like they were a decade ago, $200 a share is well within reach by this time next summer.
If you already own its stock, you might consider taking some profits although I'd continue to maintain a position. If you can pick up some shares on future weakness at $110 or below--you should. If you don't own already, I'd buy some now with the intention of buying more on weakness below $110. You might consider a third now, another third should it fall below $110 and a final third below $100. I'm not sure if all that will come to pass but if so, I think you can still make money even though you're late to the party.