Among the not so impressive details:
- Inventory rose 15% and the finished goods portion was up 29%
- Operating expenditures as a percent of sales rose from 18% to 20%
- Employee compensation was up 4% (i.e. more than inflation) and executive compensation rose 49%, or 60% if director compensation, which stayed constant, is excluded; much of the exec comp came from shares issued, which diluted earnings per share a full penny; what in heaven's name justifies that sort of increase?
- Warranty claims expense had a big jump up due in part to rising claim rates, not just additional units under warranty, which makes me wonder if management is building a warranty cookie jar in this non-cash item so that later the claim can be reversed with wonderful instantaneous effect on earnings.
- the joint venture in China seems to have got underway quickly and successfully, being relatively close to breakeven despite a bunch of one-time startup costs
- the Hyper subsidiary acquired a few years ago, contributed more to the bottom line, though it's still not large
- Cost control on the manufacturing side partly offset the Opex rise
Should we believe this optimism? A supposed key driver of sales in the USA doesn't seem to be working as the WFI managers think and say:
- Housing starts - this is said to be the key for residential sales which have dropped steadily. How does falling sales jive with this YCharts graph which shows US housing starts going up slowly for the past two years.
WFI was not alone in its 2012 difficulties as competitor LSB Industries' climate control division suffered lower sales and income, though not as much.
Bottom line: Unless the joint venture in China pays off big time and quickly, we investors (yes, I still own the stock) need to be prepared for falling sales and earnings, or stagnation at best, and probably a dividend cut from the $0.96 per share to something like $0.60. In 2012, the dividend per share was 17% more than earnings.
On that basis,
- Middle estimate: with no future growth at all and a cut in dividend to $0.60, the stock is worth around its current $16 market price.
- Low estimate: If earnings fall 5% a year on average for 5 years, WFI is only worth about $13.50.
High-estimate: With no growth for ten years, then 3% per year growth after that for ten years, WFI's value is $20.70 or so. (figures calculated using the discount model in this downloadable spreadsheet from McGraw Hill Investments book that I used in my original post on WFI in September 2010)
Which is more likely? Maybe the China venture will offset the US sales decline. Don't really know. Maybe I need to face sober reality, but like the alcoholic who keeps saying just one more drink, I'm still hangin' in.