Waiting To Warm Up To Middleby

By Stephen D. Simpson, CFA | May 16, 2011 AAA

Foodservice equipment manufacturer Middleby (Nasdaq:MIDD) is following a time-tested strategy - bring innovation and consolidation to a fragmented and, in some ways, stagnant industry. At the same time, certain realities still apply to the company and the stock. Foremost among them is the fact that the capital equipment market for the foodservice industry is still challenging, and Middleby still competes against well-known and well-heeled competitors.

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First Quarter Results Look Warm, Not Hot
Middleby's first quarter was not necessarily bad, but institutional investors will likely focus on the company's shortfall in revenue. While the company did report revenue growth of nearly 14%, the company still came in below the lowest published analyst estimate. Organic sales were up more than 7% for the period, with the commercial foodservice unit up nearly 9% and the more volatile food processing unit down about 3%.

Even if revenue was disappointing, the company did well on margins. Gross margin was nearly flat, though the company did mention pressures from higher material costs. Operating income rose 19%, and the company saw about 80 basis points of margin expansion, as flat general/administrative expenses helped offset higher sales expenses.

Still a Smallish Fish in a Big Ocean
Middleby has certainly been a powerful grower; it started the last decade at around $100 million in revenue and recognizing over $700 million in sales last year. While that makes them a significant player in the cooking/warming space, there are multi-billion dollar markets that Middleby has yet to address. Moreover, foodservice is still a fragmented market with a lot of small family-run businesses that could be acquisition targets.




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Middleby also seems to be setting its sights on more international business. Already at 20% of total revenue, sales from outside the United States should be a bigger factor in the years to come. The restaurant industry is growing rapidly in markets like China and Brazil, and the emergence of more chains and franchises is going to lead to more opportunities for commercial foodservice equipment vendors.

Still a Tough Market
While Middleby has a strong niche in products like fryers and counter-top ovens, it also has some high-caliber competition to deal with on a day to day basis. Illinois Tool Works (NYSE:ITW) is a major player with well-known brands like Hobart and Vulcan-Hart, while Manitowoc (NYSE:MTW) is perhaps better known for its refrigeration equipment but has competitive cooking equipment brands as well. Beyond that are other large players like Dover (NYSE:DOV), Electrolux and privately-held Convenience Food Systems (which is focused more on food processing and packaging).

Working in Middleby's favor is that the company is a focused and dedicated player; all of the company's capital is devoted to the foodservice industry. What's more, Middleby also has reached a scale where major chains like McDonalds (NYSE:MCD), Subway and Chipotle Mexican Grill (NYSE:CMG) are not afraid to do business with them.

The Bottom Line
Growth inevitably gets harder as companies go along and Middleby has certainly plucked its share of low-hanging fruit. As time goes on, Middleby's growth rate is going to more closely resemble the overall growth rate of the foodservice industry. Still, the company has product expansion opportunities in the United States, new market growth opportunities outside North America and the possibility for better operating leverage through efficiencies of scale. While I have run hot and cold on the stock, I have never doubted that Middleby is a good growth company. At this time, though, the price of the stock does not seem like all that much of an opportunity and I'd rather wait for a better valuation.


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