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Real-Money Stock Picks / Bryan Hinmon


Subject:  Re: Housing recover + emerging middle class Date:  3/24/2011  9:54 AM
Author:  TMF42 Number:  38 of 77

I've uncovered numerous *interesting* nuggets looking through Whirlpool's filings.

* Earnings are overstated due to extreme tax benefits (Brazilian export taxes and energy
credits in the US)

* Reported debt is something like $2.5 B (37% debt to cap), but including the company's
pension obligation and postretirement benefit obligations brings debt up to $4.6 B (52%
debt to cap)

* The company is going to have to spend $200-300 MM to chip away at its underfunded pension
each year for the next few years -- that hurts future FCF

* WHR's debt maturity schedule is hard-hitting and short dated, with major expirations in 2011,
12, 13, and 14

* The company changed its PP&E depreciation techniques. The change makes sense, but it
will have positive impacts on earnings in the near term -- I just don't like to see
these sorts of things

With all that said, shares still seem fairly cheap. A quick, back-of-the-envelope earnings power valuation suggests that at $70 shares are priced for no growth. With shares at $80, there ain't much growth baked in.

I need to do more valuation work, assess growth prospects, and put it all together, but I suspect that recent operational improvements will have greater impact than most think (margins will surprise on the upside).

Even so, this is a low margin business, with considerable (but managemable) debt loads, with a ubiquitous "international growth" story, that seems well run. I'll have to consider what margin of safety is appropriate, but there is clear upside with a housing recovery. I won't pay for that given that I haven't a clue if/when it will materialize, but on an ex-recovery basis shares may still be attractive.

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