Thursday, February 12, 2009

Whirlpool: Drowning In Pension Obligations!

Across a number of value metrics, Whirlpool (WHR) looks like a bargain. This manufacturer of home appliances creates products under several brands including Maytag, KitchenAid and Gladiator, along with its flagship Whirlpool brand.

The stock currently trades at just $34, despite the fact that the company brought in $7.50/share in operating profits in a tough 2008. Despite poor economic expectations for 2009, the company expects cost cutting and productivity initiatives to result in an EPS of $3 to $4 per share, and free cash flow generation on the order of $4.10 to $5.50/share.

Unfortunately, these typical metrics hide a significant liability: WHR's pension obligations.

A quick look at the balance sheet reveals the following:

Postretirement Benefits..................$822 million
Pension Benefits...........................$1505 million

With the company's market cap at $2.5 billion, these represent significant liabilities indeed.

While the company's debt to equity (including operating leases as we've discussed here) of 100% is a bit on the high side, it is perhaps acceptable considering Whirlpool's proven ability to weather storms and produce profits through downturns. However, combining this debt load of about $3 billion with postretirement obligations valued at over $2.3 billion results in a long line of claims to the company's profits ahead of shareholders.

That's not to say WHR doesn't represent good value at this price. However, in any valuation these retirement obligations must be factored in. This represents another reason as to why a careful reading of the financial statements is of utmost importance before investing in a stock. The simple P/E, EPS, P/B metrics are not enough.

1 comment:

widemoatinvesting said...

At the risk of waxing melodramatic, it is a little sad to see a stalwart company beginning to be overwhelmed by pension and retirement benefits.

In some ways, it shows that global competition has intensified, and once fat margins are not today so easily had.

To state the obvious--I live in a different world than my parents did.

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