Homes & Durables
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See also: Economics: Housing
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WHR $214
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Whirlpool is getting squeezed by higher input costs and supply chain troubles; is it time to buy?
(02 Nov 2021) "Elevated supply constraints" was the term management used during Whirlpool's (WHR $214) Q3 earnings conference call. Shares of America's largest consumer appliance maker fell more than 4% on the heels of the release, or about 22% off of their May highs. While revenues for the quarter ($5.5B) missed analyst expectations by 2%, they were still up 4% from the same quarter in 2020, and the company is still on pace to exceed—or at least match—its pre-pandemic annual revenues of $21 billion. As for net income, which was constricted due to higher wages and input costs, the company still made $471 in profit versus $392 million in Q3 of 2020. So, with its tiny multiple of 6.8, is the domestic maker of Whirlpool, KitchenAid, and Maytag appliances a buy? Arguably, yes. The housing market is still hot, and the strong demand for appliances has allowed the company to raise prices between 5% and 12% across the board to make up for the higher cost of raw materials. The company has also increased its stock repurchase program—a sign that management believes the shares are cheap—and maintained its healthy $1.40 per share dividend. Additionally, the Whirlpool name is highly respected throughout much of Latin America, a region which should be a nice driver for increased sales for years to come. The company's largest competitor in the Americas is GE Appliances, but that unit continues to struggle since General Electric (GE $106) sold it to a Chinese conglomerate five years ago. Despite investors' reaction to the Q3 earnings report, the future looks pretty bright for this 110-year-old Michigan-based company. With its $13 billion market cap, Whirlpool is nestled snugly in the mid-cap value space—an area we are enamored with right now. Furthermore, we believe the company will retain its pricing power even as the supply chain issues abate, meaning expanded margins. We would place a fair value of WHR shares at $300, or 40% higher than where they trade right now. |
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Z $65
OPEN $24 |
Zillow falls double digits as it presses pause on its home buying program; competitor Opendoor Technologies jumps*
(UPDATE: Zillow has announced it has exited the home flipping business altogether, sending shares tumbling another 25% on Wednesday. Considering the percentage of revenues generated by the unit, we are even more concerned now than when we wrote this piece on Monday.) It didn't strike us as a viable reason for the company's shares to fall over 10%, but Zillow's (Z $65) announcement that it would hold off on buying any more homes while it works through a backlog of properties caused the shares to tumble on Monday. Zillow Offers, the company's high-tech buying and flipping unit, purchased nearly 4,000 homes in the second quarter of the year. And the unit is hardly an afterthought: it produced $772 million of the $1.31 billion—or 60%—in total revenue generated over the three-month period. With that in mind, why would management bring buying to a screeching halt? The answer, according to management, revolves around what the company does after purchasing the properties. One of the biggest headaches for sellers involves evaluating what needs to be repaired or replaced in a home before it is listed. Using its proprietary home value algorithms, Zillow will make homeowners an offer on the spot—no repair or staging required. This means that the company must perform the repairs and prepare the house for sale. While it won't invest in homes with extensive damage or with major needed repairs, COO Jeremy Wacksman told investors that labor and supply constraints have been the major issue. At the end of Q2, the company still had over 3,100 unsold homes with an aggregate value north of $1 billion in its inventory. Competitor Opendoor Technologies (OPEN $24), meanwhile, purchased over 8,000 homes in Q2 and has contracts on another 8,000 or so. It should be noted that Opendoor just went public last December, and is using the infusion of cash from its IPO to help purchase the large number of homes.There are a number of different aspects to this story (to include how these iBuyers get paid), which we will delve into deeper in the next Penn Wealth Report. In short, we don't necessarily believe the pullback presents a good buying opportunity. Investors clearly thought the pause was a negative, shedding Z shares and buying OPEN shares on the news. Opendoor, which has yet to turn a profit, suddenly finds itself with a market cap of nearly $15 billion. It takes some creative math to justify that valuation, especially if the specter of higher rates coupled with skyrocketing home prices begin to keep would-be buyers at bay. |
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KNL
MLHR |
Herman Miller and Knoll to merge, creating office furnishings powerhouse
(21 Apr 2021) We first highlighted office furnishings company Knoll (KNL $24) in our June, 2015 issue of The Penn Wealth Report. At the time, we were fully engrossed in the final season of the hit AMC television series Mad Men. Knoll, which epitomized the modernist design movement stemming from Munich in the early 20th century, could have easily been responsible for every office scene from the fictional Sterling Cooper ad agency. Quite understandably, the company took a huge hit as offices around the world began shutting their doors last March, with KNL shares falling from nearly $30 going into the year to $9.05 by that terrible week in late March. The same was true for one of Knoll's prime competitors, 116-year-old interior furnishings company Herman Miller (MLHR $41), whose shares fell from near $50 to $15.15 in March of 2020. While both of these small-cap cyclicals rode out the storm and have witnessed a strong comeback in their respective share price, they have made the very intelligent decision to join forces. In a cash-and-stock deal valued at $1.8 billion, the two companies plan to morph into a global leader of modern design not only for the corporate office world, but also to serve the needs of the growing throng of workers who will operate either full- or part-time within their homes. In a joint statement issued by the firms, a strategic plan for "transforming the home and office sectors at a time of unprecedented disruption" was outlined. As Herman Miller was the larger of the two companies, each Knoll shareholder will receive $11 in cash and 0.32 shares of Herman Miller for each share owned, while current MLHR shareholders will end up owning around 78% of the combined entity. The two companies have, in aggregate, a presence in over 100 countries, and both have developed strong e-commerce platforms. Heading into the pandemic, the two had combined annual revenues of $4 billion. We love the deal, and we expect to see these two American companies pull off a relatively smooth integration. It is not easy to be an American manufacturing firm making high-quality products in a world of cheaper imports, but we fully believe the combined entity will skillfully carry out its bold new strategy. The deal should close by the end of the third quarter. |
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LEN
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Our Lennar position jumps 12% in one day on homebuilder optimism
(19 May 2020) On the morning of Friday the 13th of May, we had just experienced a 2,353-point drop in the Dow. This followed a 1,465-point drop on Wednesday the 11th. Two trading days, nearly three thousand points wiped out. One of our favorite homebuilders, Lennar Corp (LEN $57), dropped to $42.99 on the 13th, and we quickly picked up shares for the Penn Global Leaders Club. We figured that Lennar, the largest homebuilder in the US, would be one of the first to benefit as activity picked up and the markets came back. Shares of the Miami-based company shot up 12% on Monday as homebuilder sentiment rose from a level of 30 to 37, which was higher than expected. Granted, on a 100-point scale, a 37 may not seem impressive, but we believe that reflects just how much more room we have to grow. With mortgage rates at all-time lows and much of the spring buying season decimated by lockdown orders, we see strong growth ahead for Lennar—well above the 32% gains recorded since we picked up the shares. |
US housing starts for November far exceed expectations, new permits hit 12-year high. (17 Dec 2019) On Monday, the NAHB survey was released showing homebuilder confidence at a 20-year high. On Tuesday, we received more good news on the housing front: November housing starts rose 3.2% (against expectations for a 2% jump) to an annualized rate of 1.365 million new homes. Furthermore, permits for future home construction surged to a 12-year high. Perhaps most impressive in the Commerce Department report for the month of November was the whopping 13.6% spike in year-on-year starts, showing positive momentum for this critical economic indicator as we move into 2020. There is one complaint being voiced by builders: they are having trouble finding enough workers to build the new homes. With rates remaining low throughout 2020 (more than likely) and unemployment at 50-year lows, the coming year should be another strong one for the homebuilders.
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TOL
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Toll Brothers jumps 11% as luxury US home market remains red-hot. (21 Aug 2018) Toll Brothers (TOL $33-$39-$53), the largest luxury homebuilder in the US, spiked 11% after the company reported a surge in new orders and a 27% increase in revenues for the third quarter. Sales during the three-month period rose to $1.91 billion for the Pennsylvania-based builder, while net income rose 30%, to $193 million. Despite the recent negative headlines surrounding rising interest rates and tepid buyers, TOL recorded an 18% increase in signed contracts. The company is now on track to build between 8,100 and 8,400 units this year, with the average sales price sitting at $851,900. TOL is nearing a $6 billion market cap and the company has a current p/e of 10.
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KBH
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KB Home beats estimates, jumps double digits
(11 Jan 2018) Mid-cap homebuilder ($3.5B market cap) KB Home (KBH $16-$39-$35) spiked 12% after handily beating Q4 expectations. Versus $0.77 expected, the company earned $0.84 per share, with revenues growing by an impressive 18% year-over-year. The average sales price of a KB Home rose by 8%, to $416,500. Perhaps the most exciting news in the earnings report had to do with tax reform. The company said it expects its effective tax rate to fall from 37.7% to 27% in 2018. That is huge. KBH currently has a backlog of 4,400 homes, which bodes well for the company going forward. |
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WHR
SSNGY |
In bad news for US consumers, government calls for 50% tariff on washing machines
(21 Nov 2017) Oh, how we tried to buy American when it came to washers and dryers. It wasn't even a matter of cost, we just wanted to support US manufacturing. Unfortunately, poor quality machines and comically-bad customer service forced us to begin buying products from the likes of Samsung and LG. (One example: the motor on a GE washing machine going kaput after twelve months—one week after warranty expired—with the company telling us "sorry, nothing we can do.") Now, the cost of buying a higher-quality device might just get a lot more expensive. Bending to the will of Whirlpool lobbyists, the US International Trade Commission just issued guidance that calls for a 50% tariff on imported washing machines if the import threshold hits a certain figure. Ironically, Samsung and LG are building plants in the US to produce the machines domestically, with US labor. These machines would still face the tariff, despite being built in the US. The Trump Administration has two months to make a final decision on the matter. Our guess—our hope—is that this will simply be used as a trade negotiating tool to garner concessions from our Asian trading partners. |
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WHR
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Whirlpool wins first round in trade battle against Samsung and LG, but may lose war
(12 Nov 2017) In the last issue of The Penn Wealth Report we reported on Whirlpool's (WHR $160-$162-$203) feud with Sears, which ended in the latter's decision to stop carrying the various Whirlpool brands, with the exception of Kenmore. That feud stemmed from Whirlpool's desire to limit Sears' ability to sell rival brands like LG and Samsung. Now, the US appliance manufacturer is trying to get the federal government to impose a 50% tariff on Samsung and LG products to protect their US market share. They won the first round of the battle, with the US International Trade Commission approving the petition under the rarely-used Section 201 of the Trade Act of 1974. With Samsung and LG opening more plants in the US, however, odds are this will provide only a temporary reprieve—assuming the Trump Administration even goes along with the tariff scheme. Here's an idea, Whirlpool: make a brand of appliance that works well, has an enticing design, and is fairly priced. Do that and you will not have to worry about the likes of Samsung. We speak from experience. We have owned more than one Maytag or Whirlpool appliance that turned out to be a piece of garbage. We actively look to buy American, and don't mind spending a bit more to do so. But don't play us for patsies, Whirlpool, or pretend to drape yourself in the flag to protect an inferior product. |
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LEN
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Lennar will become largest homebuilder in US with CalAtlantic pickup
(30 Oct 2017) Last month we reported on Lennar's (LEN $40-$58-$59) aggressive strategies to entice potential new homebuyers to select one of their homes, to include paying down a buyer's student loan debt. Now, the company has made a move that will make them the largest homebuilder in the country—they will acquire rival CalAtlantic Group (CAA $30-$40-$41) for $9.3 billion. CalAtlantic builds single-family attached and detached homes in the North, Southwest, Southeast, and West regions of the country. When the deal is done, Lennar will have a market cap of around $18 billion and control around 1,300 communities in 49 markets. D.R. Horton, with its $17 billion market cap, is currently the largest homebuilder in the US. |
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WHR
SHLD |
Sears will stop making appliances made by Whirlpool, with exception of their Kenmore line
(24 Oct 2017) It’s a relationship dating back over a century. The Upton Machine Company, which later became known as Whirlpool (WHR $146-$183-$203), sold its first washers to Sears (SHLD $5-$7-$14) back in 1916, with the latter taking a stake in the company five years later. Whirlpool even makes products under the Kenmore name—a direct Sears brand. Nonetheless, this 101-year bond was virtually severed this week when Sears announced it would no longer carry Whirlpool products. Read the story in this Sunday's Penn Wealth Report, Vol 5, Issue 3. |
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LEN
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Home-builder gets creative with offers to pay down student debt
(26 Sep 2017) Single- and multi-family home builder Lennar (LEN $40-$51-$56) has come up with a really creative way to get Americans to buy the company's new homes: offer to pay down a big chunk of their student debt load. Lennar’s Eagle Home Mortgage subsidiary will pay up to 3%, or $13,000, of a purchaser’s outstanding student loans to entice them to buy. This amount will not be added in to the value of the home or increase the asking price. Government sponsored enterprise (GSE) Fannie Mae will back the loans, but the program will be closely monitored. Critics argue that it was this type of gimmick that artificially inflated the prices of homes before the great bust of 2008/2009. |
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LZB
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Shares of La-Z-Boy gap down 20% on big miss—the precise opposite of last quarter
(23 Aug 2017) If your inner aggressive investor needs another stock to play with, using either puts or calls, here’s one for you: La-Z-Boy (LZB $22-$25-$34). It was just a few months ago we reported that the recliner and upholstered furniture maker was spiking 20% on an earnings beat. Well, it’s another quarter, and quite a different story. The company’s shares fell 20% on Wednesday after missing Wall Street estimates for the fiscal 1st quarter of the year. On sales of $357 million for the quarter, the company had a net income of $11.7 million. So, that means we should buy a nice call and expect a pleasant surprise by next quarter, right? Adding to the volatility is the fact that LZB has a market cap of just $1.2 billion. |
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LEN
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(20 Jun 2017) Lennar jumps as it easily beats estimates. Almost precisely one quarter ago we reported that homebuilder Lennar (LEN $40-$53-$55) experienced an 18% spike in revenues. With this quarter's earnings release, the company is continuing its winning ways, easily topping analysts' expectations. Lennar delivered 7,710 homes for the quarter—a 15% jump Y/Y; Q2 income of $214 million equated to a $0.91 per share profit, versus $0.78 predicted; and new orders for 8,900 homes represent a 12% jump Y/Y. Shares of LEN were up about 4% in pre-market trading.
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AVHI
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(Stock of the Day, 31 May 2017) AV Homes is riding the Baby Boomer retirement wave. Based out of Scottsdale, Arizona, AV Homes (AVHI $11-$16-$19) is a micro-cap ($355 million) homebuilder catering, primarily, to the active senior community. The company is focused on building communities in four states most amenable to an aging demographic group: Arizona, North and South Carolina, and Florida. As of the end of last year, AVHI owned 5,000 developed residential lots, 2,500 partially developed lots, and 8,000 undeveloped lots. Both revenues and net income (yes, real profit!) have been growing for each of the past five years, and the company has a crazy-low P/E ratio of 2.77.
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TOL
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(23 May 2017) Toll Brothers sells more homes, increasing both revenues and profit. Luxury homebuilder Toll Brothers (TOL $25-$39-$38) opened at a new high on Tuesday after it reported selling 1,638 units in the first quarter—26% more than it did in Q1 of 2016, for 22% more in sales revenue. The company says that this has been the best spring selling season in over a decade for its "affordable luxury homes." They are attempting to broaden their brush just a bit, with the average Toll Brothers home selling for $832,400 this past quarter, as opposed to $855,500 same quarter last year. The company aims to sell roughly 7,000 new homes in 2017.
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LEN
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(21 Mar 2017) Lennar's revenue jumps 18%. America's 2nd largest homebuilder, Lennar (LEN $40-$53-$54), saw an 18% spike—to $2.34 billion—in its quarterly revenue, according to its latest earnings release. And it looks like this trend will continue into the first quarter, as the company reported a 12% jump in new orders. CEO Stuart Miller echoed the improving environment in the earnings conference call: "Since November, we have seen a combination of renewed optimism, wage and job growth, and consumer confidence." The Miami-based company sold 5,453 homes in Q4 at an average sales price of $365,000.
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