In an era of automation, technological advancements in smart household appliances, including voice-activated devices, have been playing a significant role. In addition, demand for fast-accessible and remotely-monitored home appliances has been consistently increasing, courtesy of tech-savvy consumers.
Notably, analysts expect the global home appliances market to reach USD 203.37 billion by the end of 2023, a CAGR of 2.6 percent over the 2018-2023 time periods. The upside is likely to be backed by higher disposable income, rising per capita income, improving housing and construction activities, and the availability of home appliances at competitive prices.
While the above mentioned factors speak volumes of the household appliances industry, higher raw material costs remain one of the major deterrents. Evidently, volatility in the prices of raw materials, including steel, oil, plastic, resin, aluminum, copper, zinc and nickel, have been weighing on the operating performances of key players in this space.
Notably, volatile steel and resin costs have been significantly increasing the input costs of home appliances manufacturers like Whirlpool and Electrolux. This has been resulting in weak margins for these companies over the last few quarters.
Higher tariff on steel, which forms a key raw material, due to the global trade war is an added concern. Earlier this year, the Trump administration had imposed a respective 25 percent and 10 percent tariffs on imported steel and aluminum from China.
Industry lags on shareholder returns
Raw material price inflation, unit-volume declines and unfavorable currency translations have been adversely impacting performance of key players in the industry. Additionally, increased tariffs on steel and aluminum resulting in higher input costs have largely dampened investors’ confidence for the industry’s near-term prospects.
In a year’s time, the Zacks Household Appliances Industry within the broader Zacks Consumer Discretionary Sector has underperformed both the S&P 500 and its own sector.
While the stocks in this industry have collectively plunged 35.1 percent, the Zacks S&P 500 Composite and Zacks Consumer Discretionary Sector have rallied 17.9 percent and 10.6 percent , respectively.
One-year price performance
However, it’s worth mentioning that there was a significant lack of synchronization in the performance of individual stocks within the group. While some Household Appliances stocks are suffering due to high raw material costs, others with a strong brand portfolio and strategic initiatives like cost-containment efforts, and product innovations and launches are able to stabilize their revenue graphs, leading to impressive performance. Nevertheless, industry concerns owing to higher costs are likely to weigh on margins.
Household appliances stocks trading cheap
Thanks to the underperformance of the industry over the past year, the valuation looks really cheap now. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is the most appropriate multiple for valuing Consumer Discretionary stocks.
This ratio essentially measures a stock’s current market value relative to its earnings performance. Investors believe that the lower the P/E, the higher the value of the stock will be.
The industry currently has a trailing 12-month P/E ratio of 8.9, which is below its median level of 10.6 and the high level of 13.7 witnessed in a year, thus having significant upside potential.
The space also looks inexpensive when compared with the market at large, as the trailing 12-month P/E ratio for the S&P 500 is 20 and the median level is 20.1.
Underperformance may continue due to bleak earnings outlook
Increased raw material price inflation along with higher tariffs imposed on steel and aluminum resulting in higher input costs are weighing on the operational performance of the Household Appliances stocks. These factors are likely to dent the financial performances of the various companies in the near term.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. While the above ratio analysis shows that there is a solid value-oriented path ahead, one should not really consider the current price levels as good entry points unless there are convincing reasons to predict a rebound in the near term.
One reliable measure that can help investors understand the industry’s prospects of solid price performance is the earnings outlook for its member companies. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with the last year’s reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.
The consensus earnings estimate for the Zacks Household Appliances industry is pegged at a loss of USD 12.07 per share, implying a significant decline since September 2017.
Price and consensus: Zacks household appliances industry
Looking at the aggregate estimate revisions, it appears that analysts are losing confidence in this group’s earnings potential.
The consensus EPS estimate for the current fiscal year has been revised down since Sep 30, 2017.
Zacks industry rank indicates bright prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.
The Zacks Household Appliances industry currently carries a Zacks Industry Rank #110, which places it at the top 43 percent of more than 250 Zacks industries. Our research shows that the top 50 percent of the Zacks-ranked industries outperforms the bottom 50 percent by a factor of more than 2 to 1.
Household appliances space: earnings and revenue trends
The past earnings trend of the Household Appliances space as a whole reveals that the group has been witnessing a downtrend since 2016, prior to which it was up for about two years.
Household appliances EPS
Similarly, the top-line performance of the industry has been witnessing a downtrend since 2015.
While sound economic prospects, including strong consumer spending and higher disposable income may boost demand for home appliances, increased raw material expenses can be a potent threat as it may increase prices of goods. Further, the earnings and revenue graphs of the Household Appliances industry have witnessed a persistent downtrend, signaling a gloomy long-term picture.
Nevertheless, a positive Zacks Rank for the industry indicates bright near-term prospects. Also, the players in the space are focusing on product innovations and technological advancements to bring latest developments in household appliances, better interpret customers’ requirements and cater to their demands efficiently. Moreover, cost containment efforts might help in cutting down rising raw material costs and boost margins. ― Zacks