Whirlpool currently trades at $90.94 per share and has shown little upside over the past six months, posting a small loss of 3.1%.
Is there a buying opportunity in Whirlpool, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
We're cautious about Whirlpool. Here are three reasons why you should be careful with 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 4.4% 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 like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Whirlpool’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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 $7.34 billion of debt exceeds the $1.28 billion of cash on its balance sheet. Furthermore, its 13× net-debt-to-EBITDA ratio (based on its EBITDA of $476 million 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
Whirlpool doesn’t pass our quality test. That said, the stock currently trades at 8× forward price-to-earnings (or $90.94 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. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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