Again, people respond to incentives. People like easy answers and 100% set paths. “Do this and you get this.”
A while back I put one of my rental houses up on craigslist. Now mind you, Craigslist is a wonderful service that makes life so much easier for call girls and the American Trailer Hitch Small Business Association. But when I naively posted my ad, it took all of fifteen seconds for the sharks to circle. Within minutes, I received my first scam email. I decided, no. Not this time. Now they’ve gone too far. This time, it’s personal.
Date: Mon, Apr 12, 2010 at 10:56 PM
To: firstname.lastname@example.org** CRAIGSLIST ADVISORY —- AVOID SCAMS BY DEALING LOCALLY
** Avoid: wiring money, cross-border deals, work-at-home
** Beware: cashier checks, money orders, escrow, shipping
** More Info: http://www.craigslist.org/about/scams.htmlHello,
Greetings to you.. hope you are alright! I saw your posting on craigslist.com and I will like to know if the vacancy is still available. If yes, kindly get back to me with the below details.*** Present condition of the room : ??*** The total move in cost : ??*** The move in date : ??*** The Utilities and security deposit if included : ??*** The picture of the Room : ??*** The approximate measurement of the room : ??*** Can I know more about the neighborhood: ??I will be more delighted if my enquiries are attended to and answered .Thanks
Hope to read from you soon
It’s very important to be honest when beginning a new relationship.
From: Hampton Myers <email@example.com>
Date: Mon, Apr 12, 2010 at 11:05 PM
To: Luvvalen08@aol.comHi Monalisa! Great to here such a polite and kind lady for what is hopefully a fruitful and honest relationship.*** Present condition of the room : ??you will need to clean room*** The total move in cost : ??about $1000*** The move in date : ??April 27 only. No later no sooner.*** The Utilities and security deposit if included : ??Utilities will be paid by you, since I found the place, and the security deposit, which is $1000. We also ask for a security deposit on the future utility payments, in the amount of an additional $1000*** The picture of the Room : ??See below.*** The approximate measurement of the room : ??It very small. About 10ftx5ft*** Can I know more about the neighborhood: ??It is hazardous, so please do not leave or enter the home unless it is light outside. Also it is dirty and loud, with huge potholes.I will be more delighted if my enquiries are attended to and answered .Thanks
Hope to read from you soon
Monalisa.Hope to hear back soon!
She’s hooked! She can’t resist my blend of value, quality, and location.
Thanks for the email response, And I want you to know that the total move in cost is very much okay by me but can I have the pictures of the house Cause I’ll not be able to check out the place until my arrival,so that I can make arrangement for payment prior to my arrival since I’ll be coming down from Hawaii as soon as I’m able to secure a comfortable room, since am relocating on a job transfer to the area.
I’m Presently working with the health wing of the UN,WHO, on a project that includes orphans,orphanages, heart related diseases in children between the ages of 3-12 yrs, including children immunizations programme(EPI), for the past 3 years as a certified nurse by profession, held the post of the Cold Chain Officer(CCO)..
My Physical Appearance:
Hair:- Reddish/Brown, Eyes:- Hazel, Sex:-Female Age:- 27, Location:- Hawaii , Height:- 5”4’, Weight:- 57 kg, Body Style:- Athletic/Fit, Activity Level:- Very Active, Smoking:- No (Don’t like smoking), Drinking:- Occasionally, Marital Status:- Single with no boyfriend, Children:- 0 (but willing to have one), Like:- Honest, responsible, trustworthy and hardworking people, Dislike:- I dislike lazy,messy,uncaring people and I love pets so much, hobbies:- I always love to go on date but seldom party. I swim for fun and sometimes play tennis, Languages I speak:- English, Spanish, and few Italian, Ethnicity:- Mixed, Occupation:- Registered Nurse.
Remark:- am quiet and easy going person to live with, and I see myself as a prospective tenant.
I also will want you to know that I have my car that I will be coming over with, and little of my furniture’s, please let me know if there will be room for them..
Moreover, I will want to know more about you and the neighborhood, Let me also know how I can go about securing the place down before my arrival, probably by making an up front payment to hold down the rent. The mode of payment will be by check, if this mode is ok by you, I will advise you to kindly include in your next mail with the below information:
*** Your Home address… ( where I can mail the payment ) Not P.O. BOX
*** Zip Code…
*** Your Full name ( to be written on the cashiers check ) so as to meet up with the payment on time…
I will be signing the lease for six month depending on how you want it. I will be busy from next week cos I’ll be preparing for a journey to Guam for a seminar I have to attend there but will be resuming the rent as soon as the seminar is over by the 1st week in May …Can I know more about you and the household?
for more enquiries, you can reach me or leave a message on my line ( 808-699-9860)
hope to hear or read from you soon…
Ms. Monalisa Feltham.
Time for me to close the deal. (Always Be Closing!)
From: Hampton Myers <firstname.lastname@example.org>
Date: Tue, Apr 13, 2010 at 10:07 AM
To: “Luvvalen08@aol.com” <Luvvalen08@aol.com>Hi Monalisa,This all sounds great, I’m so glad to finally find someone who is interested in the property!Let me give you some more pictures of the house, see attached pics for now.As you can see, we will need you to clean the living room for us. There are many dead rats in the house which must be removed. We would like to see you eating one if possible as well. You will find a great quantity of fecal matter in the bathroom, please take care of that. Once the house is clean, we can accept the deposits from you.
Now remember, the first, last, and most important rule for a scam is that if the mark responds to you, keep them talking. So Mona Lisa bravely forges ahead.
Date: Tue, Apr 13, 2010 at 12:29 PM
Thank you for the info.
I’m highly interested in renting the room, but why is it so rough? I think I will like to have an answer to that..
From: Hampton Myers <email@example.com>
Date: Tue, Apr 13, 2010 at 1:23 PM
To: “Luvvalen08@aol.com” <Luvvalen08@aol.com>As you say, the house is pretty rough. But you will make it nice. I might spend some of your deposit on cleaning materials for you. Do you need my PayPal email? The total with deposits is $2250.Just to make sure your english is good, I would like you to type out the following sentences. It is very important that you don’t just copy / paste!“I am your dirty little slave.”“I’ll clean whatever you want.”“Daddy touched me.”Hope to have a healthy honest relationship soon!
I guess she found another house she liked better, because she stopped emailing me after that. … For two days.
Subject: Little about me
Date: Thu, Apr 15, 2010 at 7:05 AM
Thanks for getting back to me … My name is Kelly Benson (F),I am 27yrs
old,I am fun-loving, personal, friendly,clean, caring,and respectful
of others. a non-smoker, don’t do drugs, i drink occasionally,and
drama free.I’ve been searching and searching for two weeks for a place and
been having no luck,Males/females doesn’t matter as well as homes with a
lot of roommates. I graduated last year , I am single and have no
children … i do bible study/ cell group at home, and sometimes we do karaoke night! i go to church every Sunday .
Am coming for my masters degree. I was born in Virginia Beach in
Virginia.My dad is from there too but my mum is from Canada.Am on
research work at Guam (USA), am almost done.with that bcos its part of
my prerequisite for my masters in Microbiology . I would have loved to
call you but I am not mobile .Am really interested in renting from you
and will really want to know everything about the place .I do really
love pets but i don’t have any at the moment. I would have loved to
see it but am very far,but with pictures,I am glad.
I will also like you to tell me more about you and if you have garage
or parking space cos I will have my own car come over,
pls let me know the total payment of the place and more over I
will send your email to my dad for him to email you later bcos he is
the one that will be paying the bills but nevertheless,I will like you to send
me your full Name and the mailing address, your phone number as well,so that my Dad will issue out the payment for the place as soon as
possible,with that you can hold on the place for me
till I come . I will be looking forward to your email
soonest. Thanks and have a nice day
From: Hampton Myers <firstname.lastname@example.org>
Date: Thu, Apr 15, 2010 at 12:28 PM
Umm, Kelly, you already sent me an email. I’m happy that you changed your name, I really need to know if I can count on you to eat that rat for me.
“Whirlpool Corp Issues FY 2013 EPS Guidance Above Analysts’ Estimates”
“Whirlpool Core Earnings Improve in Fourth Quarter”
And so on. Whirlpool reported a fantastic 4th quarter. The conference call was as strong as anything I can remember. Management was playing Flo Rida and the analysts were getting lap dances and handjobs, you should have been there. Whirlpool’s narrative was direct: we care about profit. We aren’t lowering price. Top line sales might suffer, but our gross margins are improving, as is our cash flow. They beat analyst estimates, and they guided up.
So let’s get right into it. The facts!
4Q12 EPS: $1.52
excluding items: $2.29
Analyst estimates: $2.23
FY 2012 EPS: $5
Analyst estimates: $7
Wait a minute. That last one doesn’t look like a beat. What happened? Well, for the last four consecutive quarters, Whirlpool has had higher adjusted income than GAAP Income.
1Q12 GAAP 1.17 Adjusted 1.41
2Q12 GAAP 1.43 Adjusted 1.55
3Q12 GAAP 0.94 Adjusted 1.80
4Q12 GAAP 1.52 Adjusted 2.29
FY12 GAAP $5 Adjusted $7
Allow me to be the first to say, lulz. But fine, whatever. WHR is a company in perpetual transition. If we wait just one more quarter, those underlying earnings will transmogrify, Harry Potter style, into FCF, and lead to sustainable dividend increases.
Operating profit was up 25% YOY, based mainly on improvements in gross profit margin. Gross margin is one of the hammer metrics that drives the share price. All the analysts pay attention to this stat. Here’s a chart.
WHR Gross Profit Margin Quarterly data by YCharts
As you can see, gross margin is reaching the upper end of its 5 year range, and FCF has benefited. Bear in mind that FCF has been <$250M since 1Q11, so everything is relative here. WHR has stated that they are targeting an 8% operating margin by the end of 2013.
So, where did those earnings go. Did the balance sheet grow by at least $400M, as their GAAP income would indicate? Not so much.
Whirlpool’s shareholder equity increased by $79M, which is kind of like $401M, except divided by 5. To be fair, dividends accounted for $155M of the discrepency, and share buybacks accounted for … oh they actually issued $43M in shares on net. So they stated $401M in earnings, but less than half that amount wound up on the balance sheet or in shareholders pockets.
As I stated in my last post, this is a worrying trend that has persisted for 3 years now, resulting in a dangerous degradation in Whirlpool’s balance sheet, expressed most acutely in its Current Ratio. So how has that played out?
WHR Cash and Equivalents data by YCharts
Above is the only chart that really matters for $WHR. They lie about their earnings so the numbers cited in the earnings releases are not terribly interesting to me. What I care about is the health of their balance sheet. And unfortunately for me, it took a sharp upturn in 4Q12.
As you can see from the chart above, inventory and accounts receivable dropped, while the cash balance rose from about $0.5B to $1.1B. At this point, Whirlpool has more cash on hand than at the start of 2012 (barely). Whirlpool’s current ratio seems to be on the mend. This situation justifies close surveillance, but for now it looks like Whirlpool has exited the storm.
What we’re left with is a company that chronically overstates its earnings, first on a GAAP basis and then by adjusting its GAAP earnings even higher. This company is trading at an 11X multiple to projected 2013 adjusted earnings, which means it’s trading at 1billionX its actual 2013 earnings. But being overvalued is not a catalyst.
As I am a strong believer in the long term strength of USA housing, the Whirlpool bullish narrative still has legs. The two catalysts for a correction in this stock are:
1. The balance sheet deteriorates to a point where WHR has to issue a secondary offering or cut its dividend, ie the truth becomes manifest. As shown in the above chart, the likelihood of this happening is quite low. On Feb 27, Whirlpool reaffirmed its 2013 earnings guidance, so underlying business trends appear to be healthy.
2. The stock becomes popular, and the sheep get slaughtered. This was the nature of the correction in $WPRT back in early 2012. The stock doubled, it was in a popular sector (natural gas fuel for vehicles), and a number of websites wrote up articles proclaiming “this company is the future!”. The stock proceeded to trade at retarded multiples, 20X revenue, 60X gross income, basically valued at >50% of its maximum future earnings potential under the best possible scenarios. I heard a coworker brag about how this stock had doubled since he bought it, so I shorted it and made a ton of money. I could definitely see that scenario playing out here. Maybe the public becomes convinced that the housing bull market is real, and we get some Whirlpool articles on Seeking Alpha and Motley Fool. But so far WHR is flying under the radar. This scenario is a long way from playing out.
3. Consumers stop buying WHR appliances. This seems to be the most likely scenario. I did a Best Buy channel check yesterday, and the sales associate said that only rich people buy Whirlpool appliances, everyone else goes with Samsung or LG. I know Whirlpool won its anti-dumping settlement against the Korean makers, but at the Best Buy I visited, it was still priced about 40% higher than the competition.
What we’re left with is a stock that is still stupid overvalued, but without any real catalyst to bring it down to earth. During the sideways action we’ve seen over the month of February, Whirlpool shares have been extremely resilient on both up days and down. It has been an outperformer, and I think more buyers are lining up to hitch their wagons to this stock.
I’ll hold onto my July puts (they’ve lost 80% of their value and only make up 50bps of my portfolio). But until further notice, I’m OUT.
A while back, I rented an Avis car and after a series of very mysteeeerious circumstances, the tire was all jacked up. I returned the car to Avis and filled out their little form.
About a year passes, and this fellow Brent from Viking (a collection service) calls me. I’m cooking dinner. He gives me the spiel, and I say “alright what’s the damage?” He replies, “five hundred dollars.”
“Cool,” I tell him. ”Please email me the relevant documents. We’ll be in touch, I need to think it over.” And thus did our trolling begin.
Now I’ve been on the other side of this. I’ve had employees steal from me, and collections is a pain in the ass. You’re usually dealing with semi-coherent proto-humans, who think they’re Johnnie Cochran. They try desperately to sound literate in their phone calls and emails, dropping words they don’t know and legalese that makes no sense to them, or to you. That was the role I chose to take on for this little game. My goal is to negotiate him down to 60%.
After I have my fun, I’m going to send him a check for the full amount.
That’s professional enough. As per usual, the debtor is outraged.
Brent seemed nonplussed at this.
And at this point I drop the surprise twist: my character cannot do simple arithmetic.
Next step is I need to get “my lawyer” to call him. I need to find a chick, dammit where can I find one of those.
I became interested in Whirlpool some time in early 2011 based on 3 things.
1. At the time I was living with a chef who had a sub-$2000/mo income in a fairly poor neighborhood of New Orleans and I noticed that while folks lived paycheck to paycheck, sometimes requiring personal loans or payday advance, they would still buy consumer discretionary items like fashion, vacation, restaurants, prepared junk food for every meal, and of course lots of alcohol at the bar.
2. At some point I concluded that human beings, when given limited resources, will always do the exact opposite of a smart financial decision.
3. Regardless of where you think our economy is heading, you know wealth inequality is gonna grow, that’s a lock.
People should save money; people will go into high-interest debt. People should replace their old worn out tires; people will wait until the tires blow and cause $1000+ in repair bills. People should buy cheap and healthy food at the store; people will consume expensive prepared food. People should save up to buy durable goods; people will continue renting these items. People should insulate and weatherproof their homes; people will turn up the heater.
I wanted to find a pure play on increasing wealth inequality and financial illiteracy. So I initiated a spread trade. I went long Nike (NKE) and Chipotle Mexican Grill (CMG). I shorted Chiquita (CQB), Whirlpool (WHR), and Cooper Tires (CTB).
Each of the shorts could screw me even if my underlying thesis played out. CQB serves corporate clients as well as consumers. WHR has a strong international presence in Brazil, Europe, and China, and may lift with a US housing recovery. CTB has an extremely low valuation that could normalize to the upside.
For some reason or other, I stuck with Whirlpool. I made some profits shorting WHR in 2011, then tried shorting it intermittently for the last 12 months. The stock has more than doubled, from $45 to $100 and I have taken significant losses.
I still trust my intuition on WHR, so I decided to do more research and see if I have it wrong or the market has it wrong.
PE trailing: 16
PE forward: 11
EPS trailing 12 mo: $6
2012 estimated EPS: $7
2013 estimated EPS: $9
YRD EPS: $3.5
2011 EPS: $5
2010 EPS: $8
2009 EPS: $4.5
Always remember that earnings should equal the derivative of the balance sheet minus dividends and share buybacks. If you cannot reconcile these two things, run away, or in this case, short the stock. Here’s Whirlpool’s change in balance sheet compared to its net income:
Income vs Balance Sheet
2011 2010 2009 2008
Equity $4,181 $4,226 $3,664 $3,006
Delta Equity -$45 $562 $658 —-
Net Income $390 $619 $328 $418
Difference -$435 -$57 $330 —-
Dividends $148 $132 $128 $130
Share buyback $30 $0 $0 $0
As you can see, in the last 2 years, stated earnings are on average $230M inflated relative to the change in the balance sheet. Dividends account for $140M of this, but this still leaves $100M per year. Stock issuance actually contributed to the balance sheet by about $20M annually, so we actually have to account for approximately $120M/yr, or a quarter of annual earnings.
Why do I care about this? Well, Whirlpool says it earned about $500M/yr since Jan 2010. As a shareholder, I want that money to either go into investments that increase earnings, go into the cash reserves, or I want WHR to send me the money as a dividend. Otherwise, I want to know, where’d damn the money go? If it went somewhere useless, then as far as I’m concerned WHR is lying about its earnings. The answer is located in the 10K under the “other comprehensive income and loss” section:
Millions of dollars
12/31/08 foreign currency derivatives pensions and postretirement liabilities securities total
Unrealized gain -$525.00 -$120.00 -$621.00 $7.00 -$1,259.00
Unrealized actuarial loss and prior service credit (cost) 333 266 — 1 600
Tax effect — — -109 — -109
Other comprehensive income (loss), net of tax -23 -86 27 — -82
Less: Other comprehensive income available to noncontrolling interests 310 180 -82 1 409
Other comprehensive income (loss) available to Whirlpool 11 7 — — 18
12/31/09 299 173 -82 1 391
Unrealized gain (loss) -$226.00 $53.00 -$703.00 $8.00 -$868.00
Unrealized actuarial gain (loss) and prior service credit (cost) -59 23 — -10 -46
Tax effect — — 24 — 24
Other comprehensive income (loss), net of tax 36 -7 -29 — —
Less: Other comprehensive income available to noncontrolling interests -23 16 -5 -10 -22
Other comprehensive income (loss) available to Whirlpool 3 — — — 3
12/31/10 -26 16 -5 -10 -25
Unrealized gain (loss) -$252.00 $69.00 -$708.00 -$2.00 -$893.00
Unrealized actuarial gain (loss) and prior service credit (cost) -86 -147 — -4 -237
Tax effect — — -177 — -177
Other comprehensive income (loss), net of tax -36 47 65 — 76
Less: Other comprehensive income (loss) available to noncontrolling interests -122 -100 -112 -4 -338
noncontrolling interests -2 -3 — — -5
Other comprehensive income (loss) available to Whirlpool -120 -97 -112 -4 -333
12/31/11 -$372.00 -$28.00 -$820.00 -$6.00 -$1,226.00
Whirlpool took $333M in unrealized losses in the last 2 years from:
-weakening in the Euro and Brazilian Rial ($86M)
-unrealized loss on derivatives contracts ($147M)
-an increase in pension and postretirement liabilities ($177M)
-plus or minus relevant taxes
Incidentally, these items had the opposite effect in 2009. WHR made a lot of unrecognized profit due to huge gains on their foreign currency and derivatives positions.
As many analysts have noted, WHR has a problem with its pension liabilities. The funding gap has been steadily increasing for the last 2 decades, and this provides a headwind of tens of millions of dollars per year that never appears on the income statement.
Correcting for this, Whirlpool earnings are about 22% lower than stated, so its trailing multiple is not 16X but 20X. That’s a lot to pay for a company with serious growth concerns going forward.
So why did the stock rocket higher since the beginning of the year?
WHR data by YCharts
Looking at the chart above, the answer is pretty clear. WHR is correlated to gross profit margins. Gross profit margins troughed in late 2011 and have climbed impressively since then. The stock has followed behind. Unfortunately I can’t plot operating income on YCharts because I need a platinum membership for that, but here’s the last 5 quarters of data:
Q3 2012 Q2 2012 Q1 2012 Q4 2011 Q3 2011
214.00 195.00 205.00 205.00 136.00
As you can see, operating income is highly leveraged to gross profit margin. Whirlpool’s operating income has nearly doubled since Q3 of 2011. After interest expense and 30% tax rate, Whirlpool would earn about $6 per share if it held steady at this rate of operating income. That’s still not very good.
I can only conclude that the bull case is that WHR will maintain its high margins or expand them, and that as the USA recovers, top line revenue will pick up a bit as well. Also there is potential growth in emerging markets, particularly Brazil and China. It’s a difficult case to make. To achieve $9 in 2013 EPS, WHR will need both higher margins and higher revenue. I think this is quite optimistic.
It gets worse.
Let’s look at Whirlpool’s current assets on a quarterly basis, during the year 2012, when the stock doubled:
WHR Cash and Equivalents data by YCharts
Whirlpool’s liquid assets have deteriorated significantly in the 3 quarters so far this year. It’s so extreme that Whirlpool’s current ratio (ratio of liquid assets to liabilities) has fallen below 1, a 10 year low! Not only that, but the part of the asset hit hardest has been cash and equivalents. The only part of the current assets that grew? The accounts receivable.
This is called AR pumping (accounts receivable pumping). AMD did this prior to its collapse, enabling it to report a blowout quarter that beat all estimates and caused the stock to rip by 50%. Remember that AMD and WHR both sell their products not to consumers but to retailers. If they suddenly expand their accounts receivables timeline, retailers will be happy to purchase extra free inventory, especially in anticipation of the holidays. This has the effect of boosting revenue and earnings for one quarter at the expense of future quarters. It’s a trick. You can play it once, that’s it. In AMD’s case, the ensuing 3 quarters sent the stock into a tailspin where it lost almost 75% of its value.
In fact, the only asset that has grown appreciably in the last 3 quarters is the line item called “other assets”. What’s an other asset?
The answer is in the 10K filings. Here’s a table of the balance sheet going back to 2007:
2011 2010 2009 2008 2007
Cash and equivalents $1,109 $1,368 $1,380 $146 $201
Accounts Receivable $2,105 $2,278 $2,500 $2,103 $2,604
Inventories $2,354 $2,792 $2,197 $2,591 $2,665
Deferred income taxes $248 $204 $295 $580 $324
Other assets $2,173 $1,615 $1,427 $954 $628
Deferred income taxes $1,893 $1,305 $1,104 $654 $328
Other noncurrent assets $280 $310 $323 $300 $300
Prepaid and other $606 $673 $653 $624 $761
Prepaid expenses $110 $89
Other current assets $514 $672
Total current assets $6,422 $7,315 $7,025 $6,044 $6,555
Property, net depreciation $3,102 $3,134 $3,117 $2,985 $3,212
Goodwill $1,727 $1,731 $1,729 $1,728 $1,760
Other intangibles, net deprec $1,757 $1,789 $1,796 $1,821 $1,854
Total assets $15,181 $15,584 $15,094 $13,532 $14,009
As you can see, some items go up and some down, but the only item that keeps expanding is “Deferred Income Taxes”. Well, what the hell is that?
Again you have to dig deeper, and it’s under the section called “deferred tax assets”. It’s made up of a bunch of different crap, but the only two items that change a lot are highlighted below:
Deferred tax assets
2011 2007 2006
Accrued expenses $94 $128 $117
Employee payroll / benefits $112 $128 $86
Foreign tax credit carryfwds $212 $102 $93
Loss carryforwards $554 $286 $256
Other $166 $137 $115
Pensions $468 $189 $249
Postretirement obligations $190 $492 $486
Product warranty accrual $60 $85 $108
Receiv / inv allowances $47 $46 $116
U.S. Energy Tax Credits $934 $88 $63
R&D capitalization $200
Restructuring costs $30 $60
Capital loss carryforwards $19 $19
Total deferred tax assets $3,037 $1,730 $1,768
net of valuation allowances $2,829 $1,658 $1,633
As you can see, the big driver is an increase in Energy Tax Credits and R&D Capitalization. So my question is, if you have an Energy Tax Credit, why hasn’t WHR used it? It has reported taxable income almost every quarter. Why is it paying any taxes at all if it has a $1B war chest of tax credits? My guess is that they only become useful if Whirlpool produces more pollution. I have no idea. Whatever the case, they’ve been collecting this dubious asset since 2006 and haven’t utilized it yet. Maybe if the USA institutes some form of cap and trade they can convert it into cash.
Since Dec 31 2006, Whirlpool has earned about $2.4B, and fully HALF of these earnings went into the form of energy tax credits and r&d capitalization tax assets!
Finally, it is worth noting that the two most commonly cited bullish catalysts for WHR are an American housing recovery and growth in international markets. The first is largely underway and Whirlpool seems to have benefited but not incredibly, and also, purchases related to new household formation only accounts for about 20% of Whirlpool’s business. The international business is a bigger worry. That is a real bull catalyst for Whirlpool and might force an exit from my position.
-Whirlpool’s balance sheet is presently very weak, especially the current portion of its assets and liabilities.
-Its cash position has fallen to dangerously low levels, and its current ratio is the lowest in 10 years. The last time their current ratio fell this low, the stock tanked after a 12 month delay.
-Only two current assets it have grown recently: accounts receivable (at the expense of cash) and deferred tax assets (depleted from the long term cache of tax assets).
-This has occurred despite record housing starts in the last 9 months.
-Whirlpool has taken significant unrecognized losses in the last 2 years, and has consistently taken unrecognized losses of about $100M / yr related to pension obligations.
-This means it has consistently overstated its earnings and been unable to allocate its headline net income stream to productive uses that will increase shareholder value.
-About 50% of Whirlpools earnings since 2007 have gone into energy and r&d tax credits, an asset of dubious quality. Correcting for this and the off balance sheet losses, Whirlpool’s earnings would be almost 70% lower!
-Whirlpool has expanded gross margins to the highest level in 3 years, causing op income to grow very fast. Even despite this, it will likely miss 2012 earnings estimates.
-For Whirlpool to beat 2013 earnings estimates would require a set of optimistic assumptions in both gross margins and total sales that are unrealistic.
-Whirlpool may have engaged in AR pumping in this last fiscal quarter, which is perfectly legal, but portends several weak quarters upcoming.
-Their liquidity position is poor, this could lead to a liquidity crunch that severely impairs their operations and damages share price.
-Whirlpool is positioned extremely poorly for a transition in America towards rentership instead of homeownership, and towards growing wealth inequality instead of a thriving middle class.
-Growth in their international business is the largest risk to shorting WHR at this moment.
Best Buy is down 50% YTD and reports earnings tomorrow morning. I follow a guy on Twitter who owns BBY. I immensely respect him and his analysis. Here are some of his selected tweets, chronicling his hilarious agony at being a BBY shareholder.
Matt Rosen @given2tweet
Although he framed it with sarcasm, the EBIT argument appears to be the bull case for BBY. Correcting for the one-time buyout of Carphone Warehouse and the latest horrible quarter, Best Buy averages a little under $1B income before tax, and about 1.5X this in free cash flow. The current market cap is $4.5B, so the potential for the stock to double from here is on the table. Also, the stock has fallen very quickly, the shorts are piling in like there is no tomorrow, and the shrieks of “bankruptcy” grow ever louder post Barnes and Noble.
I like value. I like buying stocks on the cheap. But I won’t be investing in BBY any time soon. Here’s why.
In the last 3 yrs, BBY earned an average of $2.2B in operating income, but its balance sheet has actually deteriorated in those 3 yrs. Always remember that earnings should be the derivative of the balance sheet, minus dividends and share buybacks. If you cannot reconcile these two sides, run away.
Well, I was able to reconcile it, and here’s that I found, from the balance sheet.
best buy 3 yr average
If you’re keeping score at home, the first 3 items on the list above are equivalent to LIGHTING MONEY ON FIRE. So, um, yes. BBY earned effectively negative in the last 3 yrs, which is why their balance sheet is smaller now than in 2009.
But that’s only half the story, because the above merely explains why the stock is priced as it currently is, and why that price is justified. What about the future?
Well, in the last 6 months, ie AFTER the Carphone Warehouse buyout, when Best Buy is now 100% owner of Best Buy Mobile, its liquidity position has deteriorated significantly. Look at this chart:
BBY data by YCharts
Bad operations are one thing, but when you have the lowest cash position since 2009, the lowest current ratio since 2009, and the possibility of another weak quarter, what you have is SIGNIFICANT DOWNSIDE.
A weak balance sheet means you are vulnerable. It means one bad quarter is not just “another bad quarter”, it is a stab wound to the gut. Any more losses from this point forward, and BBY is cutting into the bone.
And there is a 50/50 chance that the process starts tomorrow morning.
I’m not shorting BBY because I have no opinion on the underlying business. Will more people shop at Best Buy stores in the future, or less? Will people migrate all their shopping to the internet? I have no idea. My prior successful shorts were all companies where I could say with assurance, “no one’s going to buy the shit you’re selling.” Examples: THQ, AMD, and Nokia. If you follow me on Twitter you know I’m shorting Microsoft and I’m back shorting Nokia again. Because I know their product lineups will fail miserably. I have no idea if people want Best Buy in their lives. I’m just not going to risk any of my capital to find out.
WHR Cash and ST Investments data by YCharts
Attached, please find a presentation with some startling quotations by great historic minds about Prophet Muhammad, including Napoleon Bonaparte, Mahatma Gandhi, and George Bernard Shaw. I consider it my duty to spread this message, because I know you ain’t gonna get it elsewhere. Please share.
Those of you who know me or even follow me on Facebook or Twitter (@hamptonus) know that the US embassy riots in response to the YouTube film “Innocence of Muslims” have greatly upset the balance in my life. Every once in a while these things happen, these shocking moments of stupidity and hate either coming from my Muslim brothers and sisters, or from Americans, both of whom I love. Every time this happens I wonder to myself, can one be both a good American and a good Muslim? It’s illogical to think like this. You should care about doing good, helping people, and earning the approval of God (subhana wa ta’ala), not the opinion of ignorant crowds. But I can’t help it.
In response to the riots I created the following petition:
While I thank the 8 people that signed the petition (may All-merciful God reward you), it did not achieve its desired effect. Looking at the world, I have to conclude that Americans and Muslims are no closer to understanding each other today than they were 10 years ago.
Here is an excellent podcast about the embassy riots in Egypt (warning: some sparse use of profanity), and it really highlights how bad a job our own media does reporting the events. Summary:
1.) The protestors in Cairo numbered a couple thousand people, or <1% the crowd that gathered in the final days of the Mubarak regime. The crowds are “completely swallowed up by Tahrir square”. Basically imagine a crowd walking into a Saints game and remove 39 out of every 40 people. Many of the Muslim Brothers suspect that the reason such a small crowd could even overrun the US embassy is because the Egyptian security forces (who are pro-Mubarak anti-MB) stood aside and let them.
2.) No one respectable in the Arab world defends these protests. They’re pretty much universally condemned.
3.) The Egyptian people are getting a really distorted view of this YouTube video. A prominent Salafi TV personality aired clips from the YouTube video on NES (Egyptian religious channel) on Sep 10 and concluded by saying “this film will be broadcast in America on September 11.” So a lot of the Egyptian public believe that this video is widely endorsed by the American government and public. It’s sadly unsurprising that American and Egyptian media are spinning the same lie to their people, by either implying or stating outright that the YouTube video or the riots have wide public and institutional support.
4.) These riots are being used by many in Egypt as proof that what that country needs is an authoritarian government. Kind of like what we hear in America.
5.) Khairat el Shater, the party leader of the Muslim Brotherhood, penned an article in the NYT on Sep 13 condemning the protests. Mohammad Morsi, the Egyptian president, failed to say anything substantial on the matter for days, despite urging from his party. Charitably, you can say he did not want to draw attention, but I think this shows either incredible weakness or incredible selfishness.
Finally, I’ve tried to communicate to people exactly why Muslims get so mad by slander against Prophet Muhammad, peace be upon him.
At any rate, I’m not trying to convince you, I’m just trying to explain the position of a lot of people who don’t get commonly get a voice, at least where I live. Disagreement is fine, but hopefully if you understand the other side you won’t infer bad intent due to a lack of info. Much love. Salaam alaikum.
A petition by the peaceful Muslims.
We are diverse. We are both men and women. Orthodox and secularists. Shia and sunni. Arab and non arab. There are those among us that love America dearly (such as myself), and those that do not.
But we are united on one issue. We categorically reject the foolish, violent, and tribal riots in response to the recent slander against the Holy Prophet (pbuh). This is not the message of Islam. This is not the way to defend the Prophet’s honor. This is not a service to God Almighty (swt).
We will not let this small group of violent individuals claim the title of extremists. They are not; we are. We are extreme in our love for mankind. We are extreme in our dedication to peace and to Allah’s message in Islam. We are extreme in our loyalty to Allahhu subhanawata’ala.
Prophet Muhammad, may Allah’s peace and blessings be upon him, was slandered for his entire long life. His response was not to kill, but to teach. When we see our beloved brothers and sisters behave like animals and harm innocent people in his name, it fills us with despair. They are slandering him a second time.
Patton Oswalt claims that there are 4 kinds of sci fi stories and 4 kinds of sci fi fans. Which type are you?
Wasteland: All society has collapsed leaving only pockets of civilization, and a lone survivor travels the world, trading found goods and practicing the art of survival. Fans of this genre are loners who think that their personality is more suited to a simple world of survivalism and tool use. Exampe: Fallout. Personality type: anti-social, anti-structure.
Zombie: Some event wipes the slate clean and humans have to start from scratch. Fans of this genre prefer small groups to large groups and feel that if people had to cast off their social norms and come together just to survive, then they would be extremely valuable if not an outright leader. Colonisation sci-fi also fits this category. Example: Walking Dead. Personality type: pro-social, anti-structure.