Whirlpool (WHR) announced on Aug. 8 that it would spend $3 billion to buy InSinkErator, the world’s largest maker of food waste disposers and instant hot water dispensers.
InSinkErator is currently owned by Emerson Electric (EMR). It put the business – a 70% market share in the food waste-disposal industry – up for sale in May. Whirlpool will let InSinkErator operate as a separate company within its North American region.
The purchase will help Whirlpool maintain growth at a time when the U.S. housing market is slowing. However, while the deal makes sense, it might not be enough to convince investors to buy its stock. Here’s why.
WHR Stock Down 32% YTD
Whirlpool's stock is down almost 32% year-to-date, but it’s also down more than 7% over the past five years. That compares to a five-year return of 68% for the S&P 500 over the same period.
By the reaction of investors in the two days since announcing the deal -- it’s down more than 5% -- it appears they’re not very enthusiastic. It’s almost as if investors say Whirlpool is merely buying growth rather than doing something organic to grow its business.
InSinkErator is expected to generate $650 million in fiscal 2022 (September year-end) revenues with $175 million in EBITDA and $100 million in free cash flow. In fiscal 2023, it’s expected to add $1.25 in earnings per share.
From this perspective, you have to wonder why Emerson chose to unload the business. It’s profitable, growing revenue at 4% or more a year over the long haul, and it’s owned the company since the 1960s.
However, Emerson’s focusing its business on technology automation and less on consumer-related companies, so now appears to have been an excellent time to sell.
The other possible reason for Whirlpool’s stock swooning post-announcement is investors don’t like the price it paid for InSinkErator. Including synergies, it is paying 14x EBITDA. Bloomberg reported that RBC Capital Markets analyst Mike Dahl believes that Whirlpool is paying an “elevated price” for the waste disposal business, primarily because the housing market is slowing.
What’s the Upside for Whirlpool?
As stated above, InSinkErator is expected to add $1.25 in earnings in 2023. So, based on the 2023 analyst estimate of $22.97 a share, the addition will up its earnings by a little more than 5%.
On the revenue front, the average analyst estimate for 2023 is $20.89 billion, according to Yahoo Finance. Including a 4% increase in sales in 2023, InSinkErator should increase Whirlpool’s sales by more than 3%.
More importantly, it could introduce the waste disposal systems under the Maytag and Kitchen Brands. In addition, it could take the products overseas to other markets outside North America.
Approximately 75% of InSinkErator’s sales in 2021 were replacements for old waste disposal systems. So even though the housing market has slowed -- it only gets 15% of its sales from new construction -- there will be plenty of customers replacing their waste disposal systems in the next few years to generate recurring revenue.
The biggest problem with significant acquisitions is that they rarely work out as planned. Things go wrong, and projections fail to materialize.
Whirlpool finished the second quarter with $1.6 billion in cash. That means it will have to add approximately $1.4 billion to its existing debt of $4.8 billion at the end of June. That’s a high 72% of its market cap.
The Bottom Line
There are eight analysts currently covering Whirlpool stock. Only two consider it a buy, with the rest believing it is a hold or an outright sell. However, the median target price of $190 provides 15% upside at current share prices.
From a valuation perspective, Whirlpool said in its July Q3 2022 report that it expects full-year free cash flow of $1.25 billion. Based on its market cap of $8.65 billion, its current free cash flow yield is 14.5%. I consider anything above 8% to be in value territory.
While there’s no question it’s a potential value play, Whirlpool hasn’t delivered much in the way of shareholder returns over the past five years. Including dividends, its annualized total return is a measly 1%. Further, over every period -- 1, 3, 5, 10, and 15 years -- it’s been able to keep up with the entire U.S. market.
One has to wonder if the latest deal will do anything to move the needle. Investors don’t seem interested in what Whirlpool’s selling. Waste disposal systems likely won’t change that.
Whirlpool’s CFO, James Peters, said the following during its conference call to discuss its acquisition of InSinkErator:
“The strength of our balance sheet and strong free cash flow delivery has allowed us to return over $5 billion in cash to shareholders in the last five years through share repurchases and dividends.”
Yet, owning Whirlpool shares over the past five years has been dead money.
The deal makes sense. There’s no question of that.
However, with so many stocks down 20% or more in 2022, I think there are better stocks to buy that are down but not out and have proven to their shareholders that they can deliver over the long haul.
The InSinkErator acquisition does not make Whirlpool a buy, in my opinion.
More Stock Market News from Barchart
/Semiconductor%20by%20Gorodenkoff%20via%20Shutterstock.jpg)
/An%20image%20of%20a%20Tesla%20humanoid%20robot%20in%20front%20of%20the%20company%20logo%20Around%20the%20World%20Photos%20via%20Shutterstock.jpg)
