This morning markets slumped as the Trump administration ramped up the trade rhetoric, publishing a new list of proposed tariffs on approximately $200 billion Chinese imports. Not surprisingly given their reactions to this point, the Chinese have responded by accusing the U.S. of bullying its trade partners and promising to retaliate in kind. The news prompted the markets to halt a four-day winning streak that saw the S&P 500 Index push temporarily above short-term resistance before dropping back today. While most analysts and economists still seem to be skeptical that an extended, all-out trade war is going to happen, it’s important to remember that markets abhor conflict of any type. The longer the saber-rattling between the U.S. and its trade partners – China, the European Union, Canada, Mexico, and even Japan – lasts, the more uncertainty the markets will have to deal with, which is of course anything but bullish.
The truth is that any actual impact of tariffs – from the U.S. on another nation, or vice versa – isn’t likely to be seen on an immediate basis. The markets, however are emotional by nature, which means that they usually react as much, if not more, to the perception of news more than to its reality. That’s why the entire semiconductor sector, with massive exposure to China has seen its practically uninterrupted momentum of nearly nine years fade over the last few months and even turn bearish since early June. The same is true of industrial stocks, where steel and aluminum tariffs have muted enthusiasm for stocks in that sector despite recent, generally positive earnings growth.
It is also true that increased globalization, facilitated by technological advancement in practically every economic sector means that most companies that have been successful at growing revenues and profits over the last two decades or more have done so by extending their reach far beyond their own national borders. That means that almost no matter what business you look at, how well-established it may be, or what its perception as a “national icon” may be, if you dive deeper into its business you’ll find that tariffs between any, or all of the nations embroiled in trade tensions is exposed to a heightened risk of increased costs from tariffs. As investors, that means it can be hard to figure out how to invest actively, but conservatively by limiting your own exposure.
One way is to focus on multinational manufacturing businesses that don’t rely heavily on imported raw materials. Whirlpool Corp. (WHR) is a stock that anybody should be able to recognize easily; there is, after all an excellent chance that you have one or more Whirlpool or Maytag appliances in your own home. The company is having deal with intense competition from South Korean companies like Samsung and LG, but still remains one of the largest home appliance (large or small) manufacturers and markets in the world. How does WHR shield you from trade risk? While the company operates globally, it also localizes its manufacturing operations, which means that products sold in the U.S. are manufactured in the U.S., products sold in Europe and manufactured in Europe, and so on. Despite its global footprint, North America remains its largest market, with more than 54% of all sales in 2017 coming locally. By comparison, 23% came from Europe, the Middle East, and Africa, 16% came from Latin America, and only about 7% from Asia.
Whirlpool Corp. (WHR)
Current Price: $154.17
- Earnings and Sales Growth: Over the last twelve months, earnings increased 12%, while sales increased modestly, at only about 2.6%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. Sales are expected to continue to increase in the single digits in 2018, while earnings should strengthen, aided by strong demand from a recovery and rebound in the U.S. housing market. EPS growth – and the stock’s price – should also be aided by WHR’s $2 billion share buyback program.
- Free Cash Flow: WHR’s Free Cash Flow is healthy, and their balance sheet indicates they have good liquidity, with more than $1 billion in cash and liquid assets to supplement healthy operating margins.
- Debt to Equity: WHR has a debt/equity ratio of .80, which is a manageable number and declined from .86 in the last quarter.
- Dividend: WHR pays an annual dividend of $4.60 per share, which at its current price translates to a dividend yield of about 2.98%. Its dividend offers an attractive yield for patient investors who would be willing to hold the stock and wait for its trend to shift back to the upside.
- Recent Price Action: The stock has been trending lower for the past year, hitting a high in July of last year at about $200 before tapering lower from that point. Its current price marks a 23% decline from its 52-week high, and therein lies the opportunity. The stock hit a trend low point in late June at around $142 before rebounding to its current level and appears to be showing good support in that price area. Given the company’s strong fundamental profile, its current price could be considered a good value. Adding to its value argument is the fact that at its current price, it is trading at only ten times forward-looking earnings, while the average for stocks in the S&P 500 Index right now is 17.1.