More about zerohedge’s silly lies.
"Readers may recall that in our commentary to yesterday’s Chicago PMI disappointment we had a simple prediction ‘What this means for the ISM is not exactly clear due to the long-running tradition of baffle with BS, but on the surface it is hardly optimistic… which likely means ISM will explode higher.’ Sure enough, to no surprise at all, it just did with the headline ISM manufacturing print for July exploding from 50.9, trouncing expectations of 52.0 with the biggest beat in two years, and hitting 55.4. … One just has to laugh at the Chinazation of US economic data."
And here is a 1 year chart of the Chicago ISM vs the National Composite ISM.
I’ll translate it for you. The two indices track pretty well but not exactly. Why? Because the Chicago ISM is a regional index! It does not track the overall national economy 100%. This is obvious to anyone with even average intelligence.
But to zerohedge, any deviation from a perfect match is proof positive of conspiracy. Or as they put it, and their muppet readers to gleefully parrot, a “schrodinger economy” or a “china data manipulation.”
Truly in this life there are no suckers more gullible than conspiracy theorist suckers.
Whirlpool corporation is a big part of the reason I have turned bullish on the US economy. Let me explain.
I’ve studied and written about Whirlpool extensively, and probably lost a total of $1200 shorting this particular stock off and on since 2011. It’s been my biggest loser.
Basically my thesis since 2011 has been that the gains we see in the economy are constrained to rich people and companies. I thought our country was coming to resemble something like India, with an expansive and inefficient entitlement state, bad infrastructure, huge income inequality, and growth driven by luxury goods and investments made by the 1%.
If this was true, then the stocks that should kill are luxury stocks, but those were already played out by mid 2011. So the 2nd derivative is to play financial illiteracy. Poor people make dumb financial decisions. So go long sin stocks like tobacco, beer, and fast food, and also mass-fashion stocks like Nike. Conversely, poor people don’t buy responsible things like washing machines, new tires, or fresh fruit, so I shorted Whirlpool, Cooper Tires, and Chiquita fruit.
I did the most research into Whirlpool and it came to symbolize my whole thesis. Since mid 2012, Whirlpool started climbing, and climbing, and climbing. It has now more than tripled off its 2012 lows. I did not believe the rise. I thought WHR’s profit turnaround was a result of accounting gimmickry, which it was. I further thought that, if overall “white goods” home appliance sales did not improve, then WHR was a ticking time bomb waiting to implode. For the last 12 months, their balance sheet stabilized and their gross margins improved.
Then we got the June durable good report which showed a year over year increase in white good sales for the first time since 2008.
Then Whirlpool beat earnings and revenue estimates, and guided up.
At this point, my thesis has no leg to stand on. If consumers are buying durable goods, the only reason is that they feel secure enough in their employment to buy responsibility items and establish a household. The US economy is strong, and when capital good and investment pick up in the next 12-18 months, you should see stocks continue to surge.
Meanwhile, in my own life I’m seeing friends without jobs find jobs. I’m seeing friends with jobs looking to purchase a home and start a family, I’m seeing people from my generation starting businesses, or moving on from their first failed business to their next successful business. This is how a business cycle turns. I was late to the party, having balanced my portfolio between long and short and only capturing an average return over the last 4 years of about 25% annually, but I’m not a dummy. I know when to admit I’m wrong.
The best play on this, in my opinion, is Whirlpool itself. It has a lot of built-in skepticism because of its tremendous 200% rise since 2012, but it only trades at a forward PE of about 12. It has increasing sales, increasing margins, a strengthening consumer base in the USA, and is positioned very well for a rebound in Europe. I think profits could increase 1.5 times from here, and the stock could go north of $250 a share.
Ben Bernanke has won. The Keynesians were right.
For the next 36-60 months.
When I was working at RootSuit, we wanted to get a trademark for our product. We submitted a very limited trademark application to the USPTO. They rejected our application. The real reason is because we are small, and the patent review desk did not bother to consider our appeal in any seriousness. The reason they cited in their office action was because there was a likelihood of confusion between our trademark “RootSuit” and Roots Apparel LLC. They also included a number of other trademarks that we would be violating that I could not comprehend. It was really a confusing letter. I thought it over and tried to reason with the bureau-muppet. Here is the letter I sent.
Fig 1. The screen you apparently ignored while checking out.
Fig 2. An early 1920s Applebees. Their slogan in those days was “Your Friend in the Neighborhood … where your mother abandoned you and you wish every night for painless death.”
Fig 3. your one and only order
I wrote you on Friday, spoke with you on Friday, and then you left another vmail saying at 5:50, saying that you had missed my call but were to discuss, just not between 6-7pm. I called back, mycall went right to voicemail.If the $44 charge for “overnight” shipping really means 4 days, then that should be specifed in your shipping information, which it is not. I need the full $126.99 plus the shipping on the sectnd charge of $126.99 reimbursed.I’ve spoken with Paypal, and my bank. As a matter of fact, we had a conference call mid-day on Friday - all 3 of us were on the line. Paypal says that I have to take this issue up with rootsuit - because the transactions of this “company” are not processed thru Ebay, their is no recourse. Hence, the filing of complaints with the Internet Crime Center and Better Business Bureau.I have my own business….I do not believe that you legally disclosing what is required on your website related to shipping/handling, contact information, as for the the duplicate charges and claiming ignorance - I don’t believe a word of it.And where is the “confirmation email” tcontaining tracking number and carrier? When is the overnight package arriving?Transaction numbers and history on the duplicate charges are below.10/22/2010 REDACTED 126.9910/24/2010 REDACTED 1.0010/24/2010 REDACTED
NOTE: this is a continuation of an earlier post.
I just sent this to my collections agent.
Meanwhile, I am sending this to Avis.
Also note that I could easily have gotten away with paying $300. The agent asked me point blank “what is your best offer, let’s just close this out” (I had worn him down quite a bit), but paying less than the full amount would be wrong.
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.
It’s very important to be honest when beginning a new relationship.
She’s hooked! She can’t resist my blend of value, quality, and location.
Oh man, do you see that? She’s beautiful! And single too. And she likes kids. And she’s a doctor! And she plays tennis and swims. Either Monalisa is my dream girl, or else she’s actually a dude targeting lonely gullible old men, ha ha, yeah right. Time for me to close the deal. (Always Be Closing!)
Now remember, the first, last, and most important rule for a scam artist is that if the mark (in this case, me) responds to you, keep them talking. So Mona Lisa bravely forges ahead.
What a silly question from my future wife.
Well, I waited and waited but I guess she found another house she liked better. She stopped emailing me after that.
… For two days.
"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.