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April 27, 1999
Maytag for Mom
by Brian Graney ([email protected])
Trading at $67 1/4 as of April 26, 1999
I know you lost your favorite dishwasher when I moved away from home a few years ago, Mom, but hopefully I can make up for your disappointment by suggesting an appliance maker as a possible investment for you to consider this Mother's Day.
While you have been shopping for new appliances to take care of the household chores your son used to do for free, Maytag Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MYG)") else Response.Write("(NYSE: MYG)") end if %> has quietly watched its shares appreciate an average 77% over the past two years. Over that span, the company has improved its financial performance and its position in the U.S. marketplace by focusing on its high-end brand names and successfully introducing a steady stream of innovative products.
The company's Maytag, Jenn-Air, Performa, Magic Chef, and Admiral household appliances and Hoover vacuum cleaners are some of the most recognizable household brand names around and account for about half of the company's annual sales. The firm's remaining revenues come from its stable of commercial and restaurant appliances, such as Blodgett convection ovens, Pitco Frialator deep-fat fryers, MagiKitchen charbroilers, and Dixie-Narco vending machines. The commercial side of the business provides a great form of diversification, but the household appliance business has been stealing the show lately.
A hot housing market has ignited Maytag's sales in the U.S., which account for about 90% of total revenues. Low interest rates have prompted a surge in home buying, with new home sales in 1998 coming in at a record 886,000 units -- up 10% from 1997. Sales are expected to slow somewhat this year, but they will still be strong if the subdivisions springing up back home in Pennsylvania are any barometer. All of those homes need appliances, of course, giving Maytag a big market to tap.
For those not building a new house, the strong economy has allowed many households to update their existing appliances with more modern and efficient models, as you and Dad did last summer. For the laundry room, a popular choice is Maytag's high-end, front-loading Neptune washer. The Neptune has been a big hit since it was introduced in 1997, due to its large capacity, its better cleaning performance, and its energy- and water-saving features.
While keeping up with demand for the Neptune has been hard (Maytag has increased production capacity at that plant three times over the past two years), the washer's success is a big reason why total revenues at the firm have climbed to $4 billion last year from $3 billion in 1996. Seems like a lot of people are following in your home improvement footsteps. You were always smart that way.
Revenues should get a further spark this year from another innovation, this one aimed at making life easier in the kitchen. The company's Gemini twin range will allow time-crunched families to cook two dishes at once at two different oven temperatures without taking up any more space than a regular kitchen range. Just imagine -- now Dad can realize his dream of eating both baked potatoes and french fries with his steak dinners!
The oven's expected $1,300 price tag will provide Maytag with another source of revenue growth when it goes on sale in midsummer, complementing the continued growth from the Neptune washer. Meanwhile, agreements signed last year with Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> and home furnishings retailer Heilig-Myers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %> will ensure that the Gemini can be bought by shoppers around the country.
"That's all well and good, Brian dear," I can hear you saying. "If only Maytag were the only appliance maker out there." Well, while Maytag's 15% share of the overall U.S. large appliance market is about half that of market leaders General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> and Whirlpool <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHR)") else Response.Write("(NYSE: WHR)") end if %>, the company's high-end focused strategy allows it to capture better margins from consumers willing to pay up for its premium products. And the fact that its top-end Maytag and Jenn-Air names now account for 70% of its total appliance sales underscores the willingness of today's big ticket consumers to pay more for better quality products.
Finally, after a major restructuring effort in 1996, Maytag's books are looking decidedly better than they have in recent memory. Steady free cash flow growth over the past four quarters enabled the company to spend $180 million more on share repurchases last year than in 1997. The added cash has also given Maytag the ability to retire some of its long-term debt, which stood at 88% of shareholders equity at the end of the most recent quarter. While steep by most if not all standards, the company uses the substantial leverage to its advantage, as last year's impressive 51% return on average equity testifies. Taking out that leverage, return on average assets was a respectable 11% -- not too shabby for a manufacturing company and an indication that Maytag is covering its cost of capital.
Maytag recently said that strong sales will produce Q1 earnings north of $0.90 per share, topping the $0.81 that had been previously expected and well ahead of the $0.75 and $0.39 a share earned during the same periods in 1998 and 1997, respectively. At its current price of about $61 per share, the company is trading at roughly 17 times expected 1999 earnings of $3.63 per share. That's a nice discount to the S&P 500 index, which as a whole is currently trading at about 28 times this year's expected earnings.
If anything, Maytag's earnings estimates may be too conservative, given the strong housing market, the expected top-line growth from new products like Neptune and Gemini, and lingering business momentum carried over from last year's 63% year-over-year earnings growth performance. That means the firm's P/E ratio, already low comparatively, should actually be even lower. Short of a vase full of roses or a house full of grandkids, what more could warm a stock-loving mother's heart?
Maytag Company Information:
Trades on NYSE under symbol MYG
Maytag's corporate website: www.maytagcorp.com
Maytag's product website: www.maytag.com
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