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Middleby Making The Right Kind Of Smoke
Given that Middleby (Nasdaq:MIDD) is in the business of making commercial food service equipment, it is generally not good news for words like "smoking" or "on fire" to be attached to the company. Still, the company is making a rather impressive recovery from the worst of the recession and the nadir in restaurant equipment spending.
IN PICTURES: 10 Ways To Cut Your Food Costs
A Solid Third Quarter
Middleby reported that revenue rose more than 15% as reported, and nearly 12% on an organic basis. That was basically in line with estimates, though Middleby is not a particularly widely followed stock. Profitability was a bit soft; gross margin dropped about 50 basis points on higher steel costs, and operating income rose 14% despite close to $1 million in expenses tied to severance and reduction programs.
The Road Ahead
Why should an investor want a company involved in the capital equipment side of food service, as opposed to a consumables company like Sysco (NYSE:SYY)? Well, it would be a mistake to think that capital spending is a one-shot deal in the food service business. First, restaurant chains expand and old equipment wears out. Second, food companies are always looking for new products to stand out from the crowd - when Yum! Brands (NYSE:YUM) decided to add grilled items to the KFC menu, that required new equipment.
Apart from that, there is the expansion of hot food service into places that are not restaurants. Step into a 7-Eleven or Casey's (Nasdaq:CASY), and there is hot food on offer. Likewise, it is not really new or novel to see hot food being offered at supermarkets. Many of these companies are looking to expand menu offerings (Whole Foods (Nasdaq:WFMI), for instance, often has relatively popular cafes in their restaurants).
Also, don't lose sight of new product development. Middleby is rolling out a new spin fryer for French fries that uses less oil and reduces calories. With companies like McDonald's (NYSE:MCD) and Sonic (Nasdaq:SONC) under perpetual fire from the nutrition lobby, that would seem like a clear winner, to say nothing of other ventless cooking appliances that can reduce cost and space needs - good for restaurants and food service at places like Disney (NYSE:DIS) theme parks.
Does Middley have this all to itself? Of course not. Illinois Tool Works (NYSE:ITW), Manitowoc (NYSE:MTW), Dover (NYSE:DOV) and Standex (NYSE:SXI) are all competitors with significant overlap. So even if Middleby designs a better mousetrap, the clock is always ticking on a rival offering. Still, Middleby has gone toe-to-toe with these rivals for years, and succeeded in winning accounts away from them, so competition is nothing new.
The Bottom Line
Middleby looks expensive, and a 60% move up over the last year suggests a lot of the easy money is already gone. But maybe looks are deceiving. Middleby has been consistent about producing double-digit free cash flow margins, with a gradual upward trajectory. If the company can reach $1 billion in sales in 2014 (which would require 10% annual growth) and improve its FCF margin by 25% (from a 10-year average of 12% to 16%), the stock is worth more than $100 today. Those are aggressive assumptions, but not ridiculously so, and aggressive investors may be willing to take that plunge. (To learn more, see Free Cash Flow: Free, But Not Always Easy.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 10 Ways To Cut Your Food Costs
A Solid Third Quarter
Middleby reported that revenue rose more than 15% as reported, and nearly 12% on an organic basis. That was basically in line with estimates, though Middleby is not a particularly widely followed stock. Profitability was a bit soft; gross margin dropped about 50 basis points on higher steel costs, and operating income rose 14% despite close to $1 million in expenses tied to severance and reduction programs.
The Road Ahead
Why should an investor want a company involved in the capital equipment side of food service, as opposed to a consumables company like Sysco (NYSE:SYY)? Well, it would be a mistake to think that capital spending is a one-shot deal in the food service business. First, restaurant chains expand and old equipment wears out. Second, food companies are always looking for new products to stand out from the crowd - when Yum! Brands (NYSE:YUM) decided to add grilled items to the KFC menu, that required new equipment.
Also, don't lose sight of new product development. Middleby is rolling out a new spin fryer for French fries that uses less oil and reduces calories. With companies like McDonald's (NYSE:MCD) and Sonic (Nasdaq:SONC) under perpetual fire from the nutrition lobby, that would seem like a clear winner, to say nothing of other ventless cooking appliances that can reduce cost and space needs - good for restaurants and food service at places like Disney (NYSE:DIS) theme parks.
Does Middley have this all to itself? Of course not. Illinois Tool Works (NYSE:ITW), Manitowoc (NYSE:MTW), Dover (NYSE:DOV) and Standex (NYSE:SXI) are all competitors with significant overlap. So even if Middleby designs a better mousetrap, the clock is always ticking on a rival offering. Still, Middleby has gone toe-to-toe with these rivals for years, and succeeded in winning accounts away from them, so competition is nothing new.
The Bottom Line
Middleby looks expensive, and a 60% move up over the last year suggests a lot of the easy money is already gone. But maybe looks are deceiving. Middleby has been consistent about producing double-digit free cash flow margins, with a gradual upward trajectory. If the company can reach $1 billion in sales in 2014 (which would require 10% annual growth) and improve its FCF margin by 25% (from a 10-year average of 12% to 16%), the stock is worth more than $100 today. Those are aggressive assumptions, but not ridiculously so, and aggressive investors may be willing to take that plunge. (To learn more, see Free Cash Flow: Free, But Not Always Easy.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
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Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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