Wading Into Whirlpool

Today we are lining up well-known appliance maker Whirlpool WHR as our next covered call trade. The company is facing significant headwinds but after the stock has dropped more than 40% from its highs last summer, the combination of a low valuation and a high yield seems worthy of starting to build a small position. 

Using a covered call strategy provides additional downside risk mitigation and is probably a good way to go given there is unlikely to be a "V" type rebound in the housing market over the near term.

Whirlpool faces some significant challenges right now. First, mortgage rates of 7% have cooled activity in the housing sector with existing home sales in 2023 hitting their lowest levels since 1995. Second, many consumers are under increasing duress and are putting off big-ticket purchases. The CEO of Home Depot HD and other retailers mentioned this in their first-quarter earnings commentaries.

That said, Whirlpool beat both the top and bottom-line consensus when it reported its first-quarter results in late April. Sales were down just over 3% on a year-over-year basis, but the manufacturer still topped revenue estimates by around $80 million. Management expects non-GAAP earnings per share of between $13.00 to $15.00 in 2024. 

The shares currently trade at just over $85 a share, giving WHR a very cheap P/E ratio. In addition, the stock sports a dividend yield of some 8%.

Whirlpool management expects the company to deliver free cash flow of between $550 million to $650 million in 2024, while a market capitalization of about $4.7 billion puts WHR’s free cash flow yield in the low teens. This is also up significantly from the $366 million in free cash flow the company generated in 2023. Roughly $400 million of that free cash flow will be allocated to dividends, it should be noted. 

The company has begun to reduce its global workforce to reduce costs and improve margins. In addition, in 2023, Whirlpool formed a new entity with Turkish household appliances manufacturer Arcelik. This allowed Whirlpool to divest most of its challenged operations in Europe. 

Whirlpool has a 25% stake in the new entity and this transaction, completed earlier this year, will significantly improve cash flow and margins. Whirlpool sold its Russian operations to Arcelik in 2022 after the invasion of Ukraine. It also sold its Middle Eastern and African based operations to Arcelik in 2023 in a separate transaction. This left Whirlpool much more focused on North and South America where it is the market-share leader, and a rapidly growing India.

With a P/E multiple of just over 6x based on the midpoint of management’s 2024 guidance and an 8% dividend yield, a lot of bad news already seems priced into the stock. Provided the U.S. doesn’t see a significant recession, it seems like a good time to start to do some bottom fishing and accumulate a small position in WHR.

Option Strategy

Here is how one can initiate a position in WHR utilizing a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position. 

Selecting the December $85 call strikes, fashion a covered call order with a net debit in the $76.80 to $77.00 a share range (net stock price - option premium). Liquidity is quite solid with the options against this equity. 

This strategy provides downside protection of nearly 15% over the trade’s seven-month duration, which includes two quarterly dividend payouts of $1.75 cents a share. In addition, the trade provides return potential of 15%, including dividends, even if the stock trades slightly down by option expiration.

At the time of publication, Jensen was long WHR.