Whirlpool Corporation (WHR)

[Enterprising Investor]

Whirlpool’s Jeff Fettig: Doing the World’s Laundry (3/07/15)

By Crystal Kim

A gold statue of a bald eagle, wings spread, talons open, sits atop a bookshelf in Jeff Fettig’s spare and tidy office at Whirlpool headquarters in Benton Harbor, Mich. “It was a gift from a colleague—a symbol of the company and its values,” says the appliance maker’s CEO.

The eagle, once as endangered a species as American manufacturing, starred in a Whirlpool TV commercial in 1978. Taps played in the background as the bird cut across the sky before diving to snatch a fish out of the water. A voice-over intoned, “He lived a simple idea. Do it right or don’t do it at all.”

Fettig, 58, has done it right since landing at Whirlpool (ticker: WHR) 34 years ago, straight out of Indiana University’s business school. He rose through the company’s ranks to become CEO in 2004, and since then has made Whirlpool the global leader in the highly fragmented large-home-appliance manufacturing market, with a more-than-10% market share. His success owes in part to several savvy acquisitions—of rival Maytag and appliance makers in Europe and China. Fettig also has used the courts, when necessary, to fend off aggressive foreign competition.

Fettig’s moves, and Whirlpool’s financial results, have resonated strongly with shareholders. At a recent $211, the shares have returned an average of 14% a year, dividends included, during his tenure, compared with an average annual total return of 8% in the Standard & Poor’s 500 index.

FOUNDED IN 1911, Whirlpool today has seven billion-dollar brands, including Whirlpool, Maytag, Jenn-Air, and Kitchen-Aid. The company sells washers, dryers, refrigerators, stoves, and other so-called white goods, as well as small kitchen appliances, in 170 countries. “In our business, size and scale matter,” says Fettig.

Home appliances have been a dog-eat-dog business for decades. Sweden’s Electrolux (ELUXA.Sweden) muscled into the U.S. market in 1988 with its acquisition of WCI Group. Whirlpool moved into Europe a year later, acquiring Philips Electronics’ home-appliance business, which is now part of its Europe, Middle East, and Africa operations. Smaller U.S. companies that couldn’t stay competitive landed on the conveyor belt bound for the corporate junkyard.

Struggling Maytag agreed in 2005 to be sold to the private-equity firm Ripplewood Holdings. But Fettig and China’s Haier Electronics (1169.Hong Kong) swooped in before the deal closed to try to wrest the prize.

Whirlpool ultimately prevailed, paying $1.7 billion in cash and stock, even as other home-appliance manufacturers and industry experts questioned whether the transaction, which would give the combined company just under 50% of the U.S. appliance market, would violate antitrust laws. “We did our homework and felt very strongly that [the acquisition] would pass regulatory approval,” says Fettig.

Specifically, he argued that the Kenmore appliances that Whirlpool manufactured for Sears on a contract basis ought not to be included in Whirlpool’s market-share calculations. The Maytag deal was approved, and closed in 2006.

Fettig says Whirlpool might never have become an international competitor without the Maytag acquisition. Today, the company serves 40% of the North American market, with Electrolux a close second, at about 35%, pending its planned acquisition of General Electric ’s (GE) home-appliance business, announced last year. “Having a big market position in North America allows us to be competitive in Europe, India, and China, and vice versa,” he says.

After tucking in Maytag, Whirlpool acquired Italy’s Indesit and a 51% stake in China’s Hefei Rongshida Sanyo Electric, expanding its global platform by 30%. Indesit gave the company the No. 1 position in Italy, France, the United Kingdom, and Russia. Its Hefei Sanyo stake will give Whirlpool access to 10 times the distribution channels it had on its own in Asia, and open up rural markets in China.

ACQUISITIONS HAVE MADE Whirlpool’s results lumpy in the short term, but cutting costs and streamlining manufacturing are bound to pay off in the long run. Earnings fell 13% last year, to $914 million, or $11.49 a share, on revenue of $19.9 billion, up 6%. Analysts expect the company to earn $14.48 a share in 2015, and $16.90 in 2016, as revenue climbs above $24 billion.

Ken Zener, an analyst at KeyBanc Capital Markets, sees 14% upside in Whirlpool’s shares. He has a 12-month price target of $240, which values the stock at 17 times his 2015 earnings estimate. “The discount decade is over,” Zener wrote in a recent note, referring to rampant discounting in the appliance industry.

The trouble began when Samsung Electronics (005930.Korea) and LG Electronics (066570.Korea) began selling appliances in North America in the early 2000s. The South Korean electronics giants, which now boast a combined 18% market share in the U.S., parlayed their smartphone credibility into feature-packed, low-priced washers, dryers, and refrigerators. Other manufacturers were forced to cut prices to stay competitive, and Whirlpool’s operating profit margins declined. In 2011, Fettig finally stopped taking the punches.

Whirlpool filed a fair-trade action that year against Samsung and LG for “dumping,” or selling products below cost, and petitioned the U.S. government to impose duties on their imports. The Commerce Department sided with Whirlpool, and LG and Samsung were penalized. “Occasionally, we have to use the law [against] people who want to cause harm to U.S. manufacturing,” Fettig says.

FETTIG GREW UP on a farm in Tipton, Ind., with eight siblings. He began tending livestock and making repairs on the property at the tender age of 6. He joined Whirlpool in 1981 in financial operations and says, “I felt lucky when I got the offer. The company set clear expectations and abided by a standard of excellence that resonated with me.”

Whirlpool’s former CEO, David Whitwam, recalls meeting Fettig in 1986 through a mentoring and leadership-development program. “Jeff had leadership capabilities at a young age, which was very impressive,” he says. “He was one of those rare, exceptional people you meet in a lifetime. I said to myself, ‘If we give Jeff the right experiences, he could run the company someday.’ ”

Fettig climbed the executive ranks on the marketing side of the company. He was promoted to vice president of KitchenAid in 1989, and later headed Europe and North America operations during Whirlpool’s formative years as a global company.

For Whirlpool to be successful in the global marketplace, it had to do more than sell American goods internationally. It needed regional manufacturing operations and marketing capabilities, the better to cater to local demands. “It is hard work, it takes time, and it is a lot more than planting flags in new operations,” Fettig says.

Asian consumers, for instance, like refrigerators that come in bright colors. They prize their appliances and display them prominently in their homes as signs of status. Washing machines sold in India are equipped with specialized agitators designed to keep five-foot-long saris from getting tangled. Europeans and Americans favor microwave ovens that can brown potatoes and crisp bacon. Whirlpool’s iconic KitchenAid stand mixer, which retails for $250 to $800 and comes in 60 colors, is a universal favorite.

Whirlpool operates 15 regional technology and research centers worldwide. The company doesn’t tout technology, per se; Fettig prefers to emphasize innovation. Whirlpool customers “don’t care about technology,” he says. “They just want their washers to wash better.”

They do care about energy savings, however, and the company’s products deliver. Whirlpool has teamed with Nest Labs, a maker of smart thermostats owned by Google (GOOGL), on a washer and dryer that not only can be operated remotely, but also incorporate energy-usage-gathering data that can translate into savings on utility bills. Such innovation helped Whirlpool win six awards at the 2015 Consumer Electronics Show, underscoring the promise of the Internet of Things in the home-automation category.

WITH OPERATIONS now in place abroad, Whirlpool is tidying up at home—in Benton Harbor, where it has undertaken a $155 million renovation of its corporate headquarters, expected to be completed in 2016. The company’s 15 local facilities will be consolidated into three “campuses,” featuring open-floor plans to promote creativity and collaboration.

Whirlpool also has partnered with Purdue University to pursue energy-efficiency initiatives. Several graduate engineering students in the company’s leadership-development program have been living since last year in a 1920s bungalow near Purdue’s campus called ReNEWW house, and have been charged with transforming it into a “superefficient” home that produces as much energy as it consumes. The project will run until 2018.

Fettig takes an active interest in civic affairs. In 2009, as the U.S. auto industry struggled to survive, Michigan’s economic output declined by 5.2%; the state ranked 49th in economic growth—or lack thereof. That year, Fettig helped found Business Leaders for Michigan, a business roundtable charged with reversing this sorry state of affairs.

Doug Rothwell, president and CEO of the organization, attributes Michigan’s rebound—it was 21st in econmic growth in 2013—to Fettig’s “tenacity” and “unemotional focus” that allowed him to fix problems instead of ruminating on the reasons for them.

WHIRLPOOL HAS done its bit to help the nation’s economy by slowly bringing manufacturing jobs back to the U.S. from Mexico and elsewhere. But don’t confuse this with altruism. “We relocated jobs to the U.S. for one reason,” Fettig says. “We were making new investments in products for the North American market, and the most competitive place we could make them was in the U.S.”

Indeed, more than 80% of the products Whirlpool sells in the U.S. are now made here.

With high-skills manufacturing and tech jobs coming to Michigan, courtesy not only of Whirlpool but the rebounding auto industry and office-supply manufacturers, Rothwell predicts that the state could become a Midwestern Silicon Valley. He also expects it to climb into the top 10 in GDP in the next decade.

Whirlpool easily could have moved its headquarters across Lake Michigan to Chicago, where it already has a showroom. But Fettig chose to keep the company close to its roots—yet another reflection of Whirlpool’s values.

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