Thursday, April 30, 2009

Going in Circles with Whirlpool

Conservative Fair Value Estimate: $40

Strategy: sell June 2009 call strike $50 at around $2.25 or greater

Result: Income yield of about 5% if option stays out the money, net short position at effective price of $52.25 if the options land unprofitable.

By all means Whirlpool is not necessarily a bad company, neither do I have anything against management of of the like. This is simply a bad business to be in at this time. With about 1/2 of sales coming from North America, it looks particularly geared to the success of a US recovery. With the run-up in its stock price, almost a 100% gain in a few short months, this may be the best way to participate in a languishing company and an overbought US stock market.

Management expects Income to come in at $3-4/share in 2009, or about $300 million on the high end. With about $475 million in depreciation/amortization, OCF comes in at around $775 million. Capital expenditures are expected to range $400-450 million, so my free cash flow calculation yields about $375 million.

Invested capital, Assets minus (ST liabilities - ST debt + cash), yields approximately $880 million. That's a 4.3% ROIC using free cash flow of $375 million. The company doesn't break down capex into growth reinvestment and expansion capex, and thats ok - let's be optimistic and assume they earn a 4% ROIC on their total capex.

Free cash flow growth at a rate of 4% per year:

2009 375.00
2010 390.00
2011 405.60
2012 421.82
2013 438.70

I guess that's not too bad, in 2010 the company can be trading an enterprise value of 14x FCF. If I be even more optimistic the company can hoard up all cash flow produced and keep capex low, leading to a potential enterprise value of$4.2 billion instead of today's $6.2 billion. Using the former, and we get a EV/FCF multiple of 9.5x. At $50 a share that multiple comes in a hair above 10x.

Briefly looking at some technical indicators also suggest a topping out patter with RSI above average and the MACD trending above its signal line. My best reasoning for this explosive run? Shorts are covering their positions in this short-run bull market. Even if markets continue to trend upward this one looks positioned for a fall with practically 0 potential catalysts to suggest otherwise.

Disclosure: Will be selling call options soon as outlined above