Whirlpool (NYSE: WHR) shares surged 20% on word that it would receive a takeover bid from Bosch. However, the initial price action suggests this is a buy-the-rumor-sell-the-news event, so investors should be cautious. While a catalyst for higher share prices, the offer has yet to be tendered, and there are reasons to believe Whirlpool won’t get a premium price. The homebuilding market is steady, if not booming, because of demand, but the housing and remodeling market is generally weak. Whirlpool has struggled with sluggish results, contraction, and margin pressure for the last few years, and there is no sign of a turnaround in sight.
To keep this deal in perspective, it is essential to understand Bosch in relation to Whirlpool. Whirlpool is forecasted to generate $16.8 billion in revenue this year; Bosch generated 5.8x that much last year. For Bosch, this is an opportunity to expand its consumer goods segment with an acquisition that overlaps its footprint. Both companies have operations on six continents; for Bosch, the opportunity is to consolidate Whirlpool’s massive portfolio of brands to align with its own and trim deadweight (excess manufacturing facilities etc) and widen the margin.
Under the Whirlpool umbrella, appliance brands include the flagship Whirlpool line, Maytag, and Jenn-Air. The company also owns peripheral brands, including Insinkerator and Gladiator GargageWorks. There are many opportunities for Bosch, and Whirlpool is playing into its hands with an effort to streamline operations on its own.
What Price Will Bosch Pay for Whirlpool?
It’s hard to say exactly what price Bosch will pay for Whirlpool or how the deal will be structured, but there are some benchmarks to work with. The stock is cheap relative to earnings, so there is value to be found. Trading at 8x earnings is 50% cheaper than the average S&P 500 stock, and there is an opportunity for margin expansion and improved earnings power. However, the stock is trading well above book value. Book value equals shareholder equity; at the end of last quarter, Whirlpool’s book value was near $45, suggesting it is trading at a premium today.
Analysts favor a lower price point. The sentiment is up to Hold from Reduce, but only five ratings tracked by MarketBeat indicate a low conviction. The consensus price target of $111 assumes a 9% upside is still available, but it is trending lower, and the market led to the range's low end. The freshest target was set by Bank of America about a month after the last earnings report; they boosted their target from $63 but remained the lowest at $75.
Among the causes for concern is the dividend. The dividend is attractive at nearly 7%, and the earrings payout ratio is below 50%, but some worries are creeping into the picture. The company's leverage remains low at 2.5x equity, but debt and liabilities are rising. With the dividend's free-cash-flow payout ratio near 65%, the company may trim the payout to divert capital in another direction. It has already ceased annual distribution increases and reduced its buyback activity. The company bought back some stock in Q1, but not enough to offset dilution.
Whirlpool Experiences a Short-Covering Rally
The takeover rumor sparked a fire, but the fuel was in short stock. The short interest in this name was nearly 15% in the last report and is unlikely to have fallen since. The 20% gain in the share price smacks of short-covering, and the market is set up to fall again. The move higher met resistance at a critical level that coincides with previous support and the long-term 150-day EMA. If the market can not get above that level soon, the short-sellers could quickly push this stock back to its recent lows.
The risk is that this stock will move lower to set a lower low. In that scenario, a break below $85 would confirm the downtrend and take the market to the analysts' low target of $70. That target coincides with the 2020 lows and is another critical point; it may produce a bounce, but it may not be substantial.
