This High-Yield Stock Has Huge Potential, but Is It Safe to Buy Now?

Whirlpool's (NYSE: WHR) 6.8% dividend yield attracts high-yield investors looking for passive income, and its positioning as a stock to benefit from a lower interest rate environment makes it suitable for value investors willing to take a contrarian view. Does it add up to make the stock a buy? Here's what you need to know.

Whirlpool's challenges and opportunities

Last year hasn't gone as management expected, and it's no surprise the stock was down more than 15% in that time frame. The Federal Reserve took longer than many, including Whirlpool's management, expected to start cutting interest rates, and the enduringly high interest rates throughout the year have pressured the housing market and, in turn, demand for major domestic appliances.

The impact on Whirlpool's business has been noticeable. Management continues to expect like-for-like sales to be flat on 2023. Still, it reduced its full-year earnings before interest and taxation (EBIT) margin guidance due to weaker end-market conditions. Having started the year forecasting an ongoing EBIT margin of 6.8%, management lowered expectations to 6% on the earnings call in July, and recently reaffirmed the 6% full-year EBIT guidance on the third-quarter earnings call.

Why Whirlpool's margins have come under pressure

As noted above, the underlying sales guidance has remained unchanged, but margin guidance has weakened. There are a few reasons for this. First, Whirlpool's promotional activity over last winter and spring failed to achieve the intended traction, as its promotions could not spur increased sales. As such, management raised pricing on its promotions by 5% in May -- an activity that would help margins later in the year.

Image source: Getty Images.

Second, relatively high interest rates have pressured higher-margin discretionary purchases, such as those associated with fitted kitchens and bathrooms, where consumers tend to buy relatively more premium products. As such, the sales mix has shifted toward the lower-margin replacement sales market, where consumers tend to replace a broken refrigerator or washing machine.

Third, management started the year expecting $300 million to $400 million in cost cuts, but started walking back this figure to the low end of the range in April due to persistent inflation in its supply chain costs, and then confirmed in October that the full-year target was for $300 million.

Will Whirlpool hit its full-year guidance?

Frankly, I think there's a good chance it will miss its guidance. The reason is that, despite maintaining its overall headline guidance on the third quarter earnings call, management continues to walk back expectations for its full-year guidance in its most important segment, MDA North America.

Image source: Getty Images.

Management started the year forecasting a full-year MDA North America EBIT margin of 9% and a fourth-quarter EBIT margin of 10% to 11%. That guidance was walked back to 7% for the full year and a fourth-quarter margin of 9% on the second-quarter earnings call. Come the recent third-quarter earnings call, MDA North America's EBIT margin guidance is now 8% to 9%, according to CEO Marc Bitzer. If the fourth-quarter MDA North America guidance is being walked back, you can assume the full-year guidance is also under threat.

In addition, CFO Jim Peters noted on the recent earnings call, "we are seeing further deterioration in the underlying discretionary demand than what we experienced in the first half of 2024."

Finally, as you can see below, new home sales (good for discretionary spending on MDAs) did respond positively to the drop in interest rates from July to October. Still, the recent rise in rates may cause an adverse reaction.

US New Single Family Houses Sold data by YCharts

A stock to buy?

All of this isn't to argue that Whirlpool isn't a good value stock. Frankly, even if it misses its full-year guidance by a small amount, the stock will remain at a good value. Wall Street forecasts $11.88 in earnings per share for 2024, putting Whirlpool at just 8.7 times earnings this year.

As such, it looks like there's some margin for error here. With that approach, Whirlpool is safe to buy, it has good growth prospects in 2025, and the interest rate environment will likely favor it. Still, don't buy the stock if you can't tolerate near-term risk, because meeting its full-year guidance won't be a walk in the park.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Whirlpool. The Motley Fool has a disclosure policy.