Investors Caught Between A Rock And A Whirlpool

Whirlpool Corporation (NYSE: WHR) reported earnings this morning that missed estimates badly, and the company is seeing slower conditions in China, and that is really hurting the stock today, down more than 4%.

The company, which makes home appliances such as laundry appliances, refrigerators, cooking appliances, dishwashers, mixers, and other small household appliances, reported earnings of $2.76 per share on $4.73 billion in revenues. Wall Street analysts had been expecting earnings of $2.87 per share on $4.77 billion in revenues.

"While the challenging economic environment has kept us from achieving our targeted margins, we delivered a solid quarter," said Jeff M. Fettig, Whirlpool Corporation chairman and chief executive officer. "Our continued cost and productivity initiatives coupled with strong product innovation have helped mitigate a volatile demand environment and record levels of material cost inflation. Additionally, our recently announced price increases in key countries around the world help position us for stronger second half performance."

On the conference call, CEO Fettig said that it was an "odd" time in the recovery, as the company is experiencing high inflation, due to rising commodity costs and weak demand. In other words, the company is seeing stagflation, which is part of the reason the stock is down ~4% today.

The company is positive on the second half of the year, but given today's reaction, the market seems to not believe that. Shares are trading at 7.5 times forward earnings, which is incredibly cheap. Shares sport a 2.7% dividend yield, and if the company can not meet its own projections for the second half of the year, the dividend could be at risk.

The company is trying to raise prices here to offset some of the sluggish demand for its products, as North American demand was down 10% in the quarter, which is on par with 2009 during the Great Recession.

Marc Bitzer, president of North America, said that Whirlpool will make some additional price hikes in the region next month due to rising costs.

Whirlpool said it expects full year earnings to be in the low end of the $12 to $13 range, while Wall Street analysts are expecting $11.82 per share in earnings for 2011.

If Whirpool is not able to pass off the price increases to consumers and demand continues to slacken both here and abroad, investors may want to stick their head in the freezer.

ACTION ITEMS:

Bullish:
Traders who believe that Whirpool will be successful in passing off price increases might want to consider the following trades:

• Go long Whirpool, as it is very cheap at these levels. Shares are trading at less than 8 times forward earnings, and any increase in demand, either from a stronger housing market, remodeling or price increases could push up the multiple.

• Also consider retailers which sell Whirpool products, like Home Depot (NYSE: HD) and Lowe's (NYSE: LOW).

Bearish:
Traders who believe that Whirpool will not rebound as fast as the company expects may consider alternate positions:

• Shorting competitors like Electrolux could prove to be profitable, as the Swedish maker of appliances reported weak numbers earlier in the week.

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