Electrolux (ELUXB:SS) - Fundamental Investment Case

Electrolux AB manufactures home appliances and appliances for professional use. The company has strong brands including AEG, Electrolux, Frigidaire, Westinghouse, and Zanussi. The company gets 34% of revenue from Europe, Middle, East and Asia as of the end of FY18.  31% of revenue from North America, 14% from Latin America, 7% from Asia, and 6% from Home Care & Small Domestic Appliances.  Finally, Electrolux generates 7% of revenues and 19% of FY18 profits from the Professional Products division.  The division will be spun off by the company at the beginning of FY20.

Qualitative Concerns:

• Electrolux faces increased competition from Korean (Samsung and LG) and Chinese (Haier) competitors across almost all geographic regions.

• Due to the competitive issues, Electrolux is losing significant share in most markets.

• Analyst estimates do not reflect the reality that revenues, volumes, and profits could all continue to be pressured.

• The upcoming spin (1H20) of the more profitable Professional Products business will only leave the appliance business more susceptible to competition and deteriorating fundamentals.

Fundamental Concerns:

• Topline revenues and organic revenues are both weak.

• Gross profit margins are in a long term downtrend with EBITDA margins also recently deteriorating.

• Inventory and DIO trends point to further margin compression.

• Operating and free cash flow trends continue to deteriorate.

• Commodity, tariff, and currency risk remains with the company unable to fully offset headwinds with increased pricing. 

• Valuation is at the high end of historical averages due to excitement about the known Professional Services spinoff. 

Bottom Line: An appliance manufacturer facing intense competition causing declining organic revenue, falling market share and weakening cash flow.