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Middleby Stuck In The Middle For Now
It is tough for a company to make a lot of progress while its customers are struggling to get their own businesses moving again. So even though Middleby (Nasdaq:MIDD) seems to have very solid long-term growth prospects, it is hard to see how business really gets moving until the likes of P.F. Chang (Nasdaq:PFCB), Cheesecake Factory (Nasdaq:CAKE) and Brinker's (NYSE:EAT) see a recovery in traffic going through their doors.
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Still, patient investors can use this opportunity to get themselves up to speed on this restaurant equipment company. In the meantime, current shareholders do not seem to have any real reason to worry about the long-term story.
The Quarter That Was
Middleby has the advantage of competing in a very fragmented industry, and that often means that an aggressive and well-run business (like Middleby) can capture share even in tough markets. That certainly seems to be happening now - the company posted revenue growth in excess of 9% for the quarter and 7% overall organic revenue growth. While so many companies in the food service equipment sector are private that it makes industry-wide growth difficult to gauge, I feel pretty comfortable estimating that 7% growth is better than the industry and that Middleby continues to build share. (To gauge suppliers like Middleby, it's useful to understand restaurant stocks as well. Learn more in Sinking Your Teeth Into Restaurant Stocks.)
Luckily for investors, this was profitable growth. Gross margins ticked up more than 100 basis points from the year-ago quarter, and the company posted 10% operating income growth. Debt is still a little high here, but the company continues to generate cash flow and is using that to both pay down debt and repurchase shares.
The Road Ahead
Middleby has come a long way from being basically just a manufacturer of pizza ovens, and there is still a lot of runway in front of the company. Food service equipment is a large market, but one with relatively few large public competitors - Illinois Tool Works (NYSE:ITW) has a food service equipment business, and other companies like GE (NYSE:GE) and Siemens (NYSE:SI) have some involvement as well.
With a lot of competitors to either buy or vanquish, I do not see why Middleby could not someday become something like the Sysco (NYSE:SYY) of the restaurant and food service equipment space. To reach that sort of success, the company will need more big-ticket wins with major firms - similar to what the company has already accomplished with Yum! Brands (NYSE:YUM). These wins tend to be irregular, though, so it will take some patience on the part of investors and they should not expect these wins on a quarter-to-quarter basis.
One Small Problem
This may seem like an odd quibble, but I wish the company were not spending capital on share buybacks right now. The stock's volume is not too low yet, but there is a risk that continued share buybacks could make these shares unattractive to institutional owners. Say what you will about Wall Street, but the reality is that mutual funds and hedge funds ultimately move most stocks and a stock that is too illiquid can languish as a value trap.
The Bottom Line
From a purely fundamental standpoint, though, I still like this stock. It is not cheap enough to entice me to buy, but the growth prospects and returns on capital are such that it is on my watchlist. I also realize that the company's relatively high short interest could be mean that this one jumps away from me before I can buy. Still, with worries all around that the U.S. is on the verge of a double-dip back into recession, I would choose caution over courage and sit back in the hopes of getting these shares at even lower price in the next few months. (For related reading, take a look at Short Interest: What It Tells Us.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 4 Biggest Investor Errors
Still, patient investors can use this opportunity to get themselves up to speed on this restaurant equipment company. In the meantime, current shareholders do not seem to have any real reason to worry about the long-term story.
The Quarter That Was
Middleby has the advantage of competing in a very fragmented industry, and that often means that an aggressive and well-run business (like Middleby) can capture share even in tough markets. That certainly seems to be happening now - the company posted revenue growth in excess of 9% for the quarter and 7% overall organic revenue growth. While so many companies in the food service equipment sector are private that it makes industry-wide growth difficult to gauge, I feel pretty comfortable estimating that 7% growth is better than the industry and that Middleby continues to build share. (To gauge suppliers like Middleby, it's useful to understand restaurant stocks as well. Learn more in Sinking Your Teeth Into Restaurant Stocks.)
Luckily for investors, this was profitable growth. Gross margins ticked up more than 100 basis points from the year-ago quarter, and the company posted 10% operating income growth. Debt is still a little high here, but the company continues to generate cash flow and is using that to both pay down debt and repurchase shares.
Middleby has come a long way from being basically just a manufacturer of pizza ovens, and there is still a lot of runway in front of the company. Food service equipment is a large market, but one with relatively few large public competitors - Illinois Tool Works (NYSE:ITW) has a food service equipment business, and other companies like GE (NYSE:GE) and Siemens (NYSE:SI) have some involvement as well.
With a lot of competitors to either buy or vanquish, I do not see why Middleby could not someday become something like the Sysco (NYSE:SYY) of the restaurant and food service equipment space. To reach that sort of success, the company will need more big-ticket wins with major firms - similar to what the company has already accomplished with Yum! Brands (NYSE:YUM). These wins tend to be irregular, though, so it will take some patience on the part of investors and they should not expect these wins on a quarter-to-quarter basis.
One Small Problem
This may seem like an odd quibble, but I wish the company were not spending capital on share buybacks right now. The stock's volume is not too low yet, but there is a risk that continued share buybacks could make these shares unattractive to institutional owners. Say what you will about Wall Street, but the reality is that mutual funds and hedge funds ultimately move most stocks and a stock that is too illiquid can languish as a value trap.
The Bottom Line
From a purely fundamental standpoint, though, I still like this stock. It is not cheap enough to entice me to buy, but the growth prospects and returns on capital are such that it is on my watchlist. I also realize that the company's relatively high short interest could be mean that this one jumps away from me before I can buy. Still, with worries all around that the U.S. is on the verge of a double-dip back into recession, I would choose caution over courage and sit back in the hopes of getting these shares at even lower price in the next few months. (For related reading, take a look at Short Interest: What It Tells Us.)
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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