Whirlpool Corporation (NYSE:WHR)’s intrinsic value may be 91% above its share price

Key findings

• Whirlpool’s estimated fair value is $196 based on 2-step free cash flow to equity
• Whirlpool is estimated to be 48% undervalued based on the current share price of $102.
• The analyst price target of $110 for WHR is 44% below our fair value estimate

Does Whirlpool Corporation (NYSE:WHR)’s June share price reflect its true value? Today we’ll estimate the stock’s intrinsic value by taking the expected future cash flows and discounting them to their present value using the Discounted Cash Flow (DCF) model. Models like this may seem incomprehensible to a layperson, but they’re relatively easy to follow.

Companies can be valued in many ways, so we want to point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for Whirlpool

The model

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company might have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. In the first stage, we need to estimate the company’s cash flows for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow down more in the early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today. Therefore, the sum of these future cash flows is discounted to today’s value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 5.5 billion US dollars

The second phase is also called the terminal value, which is the company’s cash flow after the first phase. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.4%. We discount the terminal cash flows to today’s value at a cost of equity of 12%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = 1.4 billion US dollars × (1 + 2.4%) ÷ (12% – 2.4%) = 16 billion US dollars

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 16 billion US dollars ÷ (1 + 12%)¹⁰= 5.2 billion US dollars

The total value or equity value is then the sum of the present value of future cash flows, which in this case is $11 billion. In the final step, we divide the equity value by the number of shares outstanding. Compared to the current share price of $102, the company appears quite valuable at a 48% discount to the current share price. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

The assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing with them. The DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we are looking at Whirlpool as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 12%, which is based on a leveraged beta of 2,000. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Whirlpool

Go on:

While a company’s valuation is important, it shouldn’t be the only metric you consider when researching a company. DCF models aren’t the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, slightly adjusting the terminal value growth rate can dramatically change the overall result. Why is the intrinsic value higher than the current share price? For Whirlpool, we’ve compiled three basic aspects you should evaluate:

1. Risks: For example, we found 3 warning signs for whirlpool (2 doesn’t suit us so well!) that you should know before investing here.
2. Future income: How is WHR’s growth rate compared to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS The Simply Wall St app does a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, just search here.

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This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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