Whirlpool: Why Goldman Sachs Is Turning Bearish On The Appliance Maker

The appliance industry is one of the weakest investment sectors, as it has intense competition and raw material inflation, according to Goldman Sachs. The sell-side firm now sees multiple reasons for bearishness on Whirlpool Corporation WHR.

The Analyst

Goldman Sachs' Samuel Eisner downgraded Whirlpool's stock rating from Neutral to Sell with a price target lowered from $164 to $135.

The Thesis

The North American appliance market has become more fragmented over the past decade, with competitive threats materializing from international firms like Samsung and LG, Eisner said in the downgrade note. (See the analyst's track record here.)

While Whirlpool's market share losses over this time period have been "limited," it did leave a dent in its pricing power. Over the past three years, price has had a stronger negative relationship with Whirlpool's volume growth in excess of the overall industry compared to the prior three-year period, Eisner said.

Foreign firms are ramping domestic production of washing machines in reaction to the government's tariff on foreign washing machines. Samsung said it will be able to produce 1 million units in 2018 and LG is expected to start production in the fourth quarter. Over the medium- to long-term, these companies could decide to expand domestic production of other appliances, like refrigerators and freezers — 28 percent of Whirlpool's revenue — or cooking appliances, which comprise 18 percent of Whirlpool's revenue, the analyst said.

A key component of Whirlpool's bullish story is its high free cash flow generation and premium yield against its rivals, Eisner said. The company is now in the bottom quartile for free cash flow and sales against the analyst's coverage.

Whirpool has historically converted net income into free cash flow at a rate of 65 percent, and even if it is able to increase the metric to around 80 percent by 2020, it will still be short of the average of 100-percent conversion among comparable building products companies, according to Goldman Sachs.