BUSINESSWEEK ONLINE : AUGUST 9, 1999 ISSUE
COVER STORY

Can Maytag's Stock Keep Spinning Faster?
Having soared 150% in two years, beating expectations gets harder and harder

How can you fault a company that has engineered a successful turnaround and has hot new products, expanding profit margins, and surging earnings? Often, there's just one nagging doubt in such a case: Can the company do even better?

That's the key question Maytag (MYG) investors must answer before buying the stock now. Despite all the positive attributes of the company -- including a promising new CEO -- some analysts believe the stock is at a peak. Maytag shares have climbed 150% in the past two years, but this summer they've hardly budged. The stock reached a 52-week high of 74 13/16 on May 24 and closed July 29 at 70 3/4.

"Fundamentally, I like what the company is doing," says McDonald Investments analyst Justin Maurer, who initiated coverage of the stock with a hold rating on May 26. "I just wondered what the potential upside in the stock is."

STUCK ON A CYCLE? Maytag, which makes major home appliances like dishwashers, ovens, and washing machines, falls into the consumer cyclical sector of the stock market. That means its growth is tied to the economy, and in particular to housing starts, which have been booming for years. If the economy starts to slow -- and on July 29, the government's latest report on gross domestic product showed slower growth than expected -- Maytag sales would suffer.

Plus, Maytag has already enjoyed huge gains in sales and earnings. High-margin hit products, such as its Neptune washer and Hoover upright vacuum cleaner, helped earnings per share grow 70% in 1998 over 1997. Speaking at the annual shareowners' meeting in May, outgoing Chairman and CEO Leonard A. Hadley said, "For Maytag, last year was a grand slam home run, wind-aided by the strong economy and industry environment." Such a successful year makes quarterly growth comparisons more difficult this year, says Maurer.

One reason Standard & Poor's upgraded the stock on Apr. 28 is Maytag's record of consistently beating analysts' estimates for several quarters. But on July 15, Maytag reported that net income grew 30%, to $88.2 million, or 97 cents a share -- somewhat of a disappointment to investors, since Maytag merely matched analysts' expected EPS of 97 cents.

Going forward, analysts expect the company's earnings per share to grow at a rate of only about 15% a year long-term. Maurer thinks the stock is fairly valued relative to its p-e on 2000 earnings of 16 (growth stocks are often considered expensive if their forward p-e exceeds their expected earnings growth rate).

SECULAR GROWTH. Still, plenty of investors think Maytag has a lot more life in it, and the company's fortunes may not be as tied to the economy as they once were. Rather than new housing starts, Russell Leavitt, an analyst with Banc of America Securities, thinks Maytag's earnings growth will come from gaining market share from competitors Whirlpool and General Electric and from expanding profit margins as it sells more high-end products.

Even better, Maytag's products are changing the replacement cycle of the appliance industry, says Sean D. Katof, an assistant portfolio manager at Invesco Funds Group. One startling aspect of its successful Neptune washer is that a good percentage of buyers are replacing machines that still work. "If Maytag can continue to come out with exciting products like that, what you've done is gone from a purely cyclical business to a business that has some secular growth characteristics," he says. He thinks new products like its Gemini double-oven range, introduced around June, and upcoming rapid-cook oven will be big hits.

Several analysts also argue that the stock is a good value at its current level. While it may be trading at a premium to its growth rate, its 16 multiple is still much less expensive than most of the stocks in the S&P 500, which are trading at a multiple of 25 times 2000 earnings. Long-term growth of 15% a year is nothing to sneer at, says Leavitt, who has a $90 price target on the stock.

FOLLOWERS. Maytag's low p-e relative to the market could be important in the weeks to come. On July 29, the Dow Jones industrial average fell 181 points, or 1.7%, after a government report citing rising labor costs sparked fears that the Federal Reserve would be prompted to raise interest rates to head off inflation. If rates go up, high p-e stocks get hammered. Maytag shares fell on July 29, but only 7/8 points, or 1.2%.

Of course, Maytag's competitors are also trying to be more innovative and come up with premium products with unique features. Whirlpool is ramping up new lines, and GE is coming out with its own a fast-cook oven. But Invesco's Katof believes these companies are just following Maytag's lead and are a long way from creating a culture of innovation that Ward and Hadley have worked years to establish.

"Long-term, Maytag is really showing the ability to increase its margins and come out with new exciting, innovative products," says Katof. "Because of that, I really believe going forward it will continue to beat expectations." For investors who agree, those words amount to a green light to invest now. But even so, Maytag buyers would be wise keep an eye on the economy and housing starts just the same.

By Amey Stone in New York

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