There's a question that comes up very commonly: 'What's going to change in the next five to 10 years?' But I very rarely get asked, 'What's not going to change in the next five to 10 years?'
-- Jeff Bezos, founder of Amazon
Investors are often seduced into believing they have to find and invest in the "next big thing." But that's not how Warren Buffett -- one of the greatest investors of all time -- does it.
It's fascinating that Buffett befriended Microsoft founder Bill Gates in July 1991. But Buffett never bought Microsoft stock, despite Gates' pitches. Had he just invested $1 million (chump change for him) in July 1991, it would now be worth over $250 million (if dividends were reinvested along the way).
MSFT total return Price; data by YCharts.
Gates reportedly made his case to Buffett regarding computers by saying, "It's going to change everything." Buffett then wryly asked if computers would change the way people chewed gum.
Buffett doesn't invest in the next big thing. Rather, as highlighted in the Bezos quote above, he invests in the things he's confident have staying power (like gum): the things that aren't going to change in the next five to 10 years. And that's why consumer appliance company Whirlpool (WHR +0.74%) is a stock that students of Buffett might find interesting right now.
Is Whirlpool a Buffett stock?
Owning name brands recognized around the world, Whirlpool makes appliances in four product categories: laundry, refrigeration, cooking, and dishwashing and other. These categories accounted for 28%, 30%, 26%, and 16%, respectively, of full-year 2021 net sales.
Whirlpool's business is one of those things that don't change. I can't envision a world where people abandon Maytag washing machines, KitchenAid mixers, and other Whirlpool products. Appliances like these are seen as necessities. The Whirlpool brand is over 100 years old, and it's likely to endure another 100 years.
To be clear, Whirlpool is not the next big thing in home appliances. As the chart below shows, revenue has barely increased during the past decade. And its earnings per share (EPS) can have big swings up and down because of the cyclicality of this consumer-discretionary business.
WHR revenue (TTM); data by YCharts. TTM = trailing 12 months.
Last year wasn't good for Whirlpool. Inflation increased its costs, consumer demand slumped compared to the jump it saw in the early days of the pandemic, the war in Ukraine caused the company to sell its Russian business, and it's been working through elevated inventory. All of these things hit earnings.
Moreover, Whirlpool is restructuring its business by jointly creating a new company in Europe with the Turkish company Arçelik -- a division of Koç Holding -- and maintaining a minority interest in the new entity.
And it's selling its operations in the Middle East and Africa. These moves should save costs long term, but they come with hits to profits now, at least from an accounting perspective.
Because of all the problems, the market has turned on Whirlpool stock. Shares are down about 40% from their highs.
NYSE: WHR
Key Data Points
Is this a Buffett pattern?
In my effort to be an investor who thinks more like Warren Buffett, I can't help but notice a similarity between Whirlpool and recent Buffett buys like Occidental Petroleum (OXY +1.21%) and HP (HPQ 1.46%).
Occidental Petroleum's stock price plunged in 2020 when oil hit abnormally low prices, which was problematic for the business at the time. But it was reasonable to think the situation was temporary (which it was).
For HP, its revenue surged in 2021, perhaps fueled by government stimulus. This pulled demand forward, and results in 2022 haven't been as good. Consumers already have newer computers and printers from 2021. But I don't expect that to continue forever. Consumers will eventually replace their gear and will probably consider buying from HP.
Because of challenges to the two businesses and uncertainty from investors, these stocks fell to crazy-cheap valuations. But they were still profitable and rewarding shareholders by paying dividends.
I believe the same is true for Whirlpool. This is an enduring consumer brand with challenges right now. But it's still profitable, paying a dividend, and should overcome its problems in time.
OXY price to free cash flow; data by YCharts.
The chart above shows Whirlpool trading at a price-to-free-cash-flow valuation of almost 14. But management expects to report free cash flow of about $800 million in 2022, which means it trades closer to 10 times its free cash flow -- one of its lowest valuations ever.
Moreover, with a dividend yield north of 4.5%, Whirlpool has one of its best yields ever.
In conclusion, remember that Whirlpool looks cheap right now based on challenged financial results. If its problems are indeed temporary, investors can expect improvements to the numbers, which would make the stock an even more attractive buy at today's prices.
Therefore, for investors looking for solid dividend income and for one of those things that doesn't change, Whirlpool deserves a serious look.
