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Household Appliances Industry Outlook Dampened by High Costs

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The Household Appliances industry comprises companies that manufacture and market home appliances and other related products. Household or domestic appliances include electrical and mechanical devices that facilitate chores like cooking, cleaning, laundry or food preservation.

Companies in this industry make refrigerators, washing machines, water coolers and heaters, microwave ovens, toasters and coffee makers, among other devices. These companies sell products through a network of mass merchandisers, retailers, distributors, dealers, and other builders and outlets. In an era of automation, players in the industry are committed to constant technological enhancements to offer smart home appliances, for instance, voice-activated and hands-free devices.

Let’s take a look at the industry’s three major themes:

  • Although regular technological upgrade is a major survival strategy in the industry, higher spending on technology and innovation has been eating into companies’ margins and profits. Freight cost inflation is an added concern. Prices for raw materials like steel and aluminum, which form the base metals for these companies, remain volatile due to tariff-related headwinds. Also, volatility of oil, plastic or other secondary raw material prices is a bother. The material costs have been bumping up operational expenses, eroding companies’ profits.
     
  • Apart from high costs, economic uncertainties on the domestic and international fronts are deterrents to growth. One of the major brunt being borne by the U.S. economy is the 15-month trade war between the United States and China. Despite low mortgage rates, we note that U.S. buyers remain apprehensive owing to global economic uncertainties. Quite apparent, sales of new U.S. single-family homes dropped 0.7% in September. Moreover, sales of existing homes fell 2.2% in the same period. Softness in housing and construction activities might lead to lower demand for home appliances. Apart from these, adverse currency translations are a major threat to these companies’ top and bottom lines. Still, analysts expect the Global Household Appliances Market to reach a worth of $763.45 billion, at a CAGR of 5.4% in the 2018-2025 period.
     
  • On a positive note, demand for fast-accessible and remotely-monitored home appliances has been consistently rising, thanks to tech-savvy consumers. These requirements are compelling industry players to make investments in innovation and Research & Development (R&D) to make differentiated and handy products. These companies are also committed toward manufacturing appliances that are a one-stop solution for major household tasks. Additionally, appliance makers are installing smart grids, thermostats, digital inverter compressors and other monitoring sensors to make devices more energy-efficient. As a result, household appliances are becoming more high-tech, embedded with smart sensors and the Internet of things (IoT)-enabled technology. These innovations can significantly boost the companies’ top lines. Meanwhile, the industry players are resorting to higher pricing actions and cost-productivity programs to boost margins and profitability.

Zacks Industry Rank Indicates Gloomy Prospects

The Household Appliances industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #222, which places it at the bottom 13% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has gone down 4.1%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry vs. Broader Market

The Zacks Household Appliances industry has outperformed both the broader Consumer Discretionary sector and the S&P 500 index over the past year.

Stocks in this industry have collectively gained 60%, compared with the Consumer Discretionary sector and the S&P 500 Composite’s respective growth of 9.7% and 14.7% in the same period.

One-Year Price Performance



Household Appliances Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, a commonly used multiple for valuing Consumer Discretionary stocks, the industry is currently trading at 9.41X compared with the S&P 500’s 17.24X. Further, the sector’s forward-12-month P/E ratio stands at 18.37X.

Over the last five years, the industry has traded as high as 13.34X, as low as 6.37X and at the median of 10.01X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)


Bottom Line

Product innovation and launches coupled with the latest technologies are expected to act as growth drivers for the industry. Meanwhile, investments in technological advancements and product development are escalating costs and consequently dampening margins. Higher freight costs and raw material inflation mar performance of these players. Furthermore, any slowdown in housing activities may have an adverse impact on demand for household appliances.

While none of the stocks in the Household Appliances industry currently sports a Zacks Rank #1 (Strong Buy), we suggest two stocks with a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Whirlpool Corporation (WHR - Free Report) : This Benton Harbor, MI-based home appliances’ leader has surged 59.2% in a year. Further, the Zacks Consensus Estimate for its 2019 earnings per share has been revised 1.3% upward in the past 30 days.

Price and Consensus: WHR



Hamilton Beach Brands Holding Company (HBB - Free Report) : This Glen Allen, VA-based electric household and specialty housewares small appliance designer has gained 17.8% in the past three months. The Zacks Consensus Estimate for the company’s current-year earnings has been steady over the past 30 days.

Price and Consensus: HBB



Investors may also consider this Zacks Rank #3 (Hold) stock.

Howden Joinery Group Plc (HWDJY - Free Report) : The consensus earnings estimate for this London-based company has been stable for the current year in the past 30 days. The company has advanced 23.2% in the past year.

Price Performance: HWDJY



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Whirlpool Corporation (WHR) - free report >>

HOWDEN JOINERY (HWDJY) - free report >>

Hamilton Beach Brands Holding Company (HBB) - free report >>