3 Reasons Middleby Isn't Middle Of The Road
SmartMoney magazine, as part of its 20th anniversary issue, highlighted the 10 best stocks of the past 20 years. Number two on the list is Middleby Corp. (Nasdaq:MIDD), whose total return since April 1992 is 14,330%. Using technology and acquisitions to fuel its growth, its market cap draws ever closer to mid-cap status. Middleby is anything but middle of the road.
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Fourth Quarter Earnings
Middleby delivered fourth quarter earnings of $1.87 per share and full-year earnings of $5.15 per share, for growth of 65% and 30% respectively. The analysts were expecting Q4 EPS of $1.30. Middleby beat it by 43%. As a result of this earnings smack down, analysts raised their 2012 full-year estimate to $5.80 a share, 12.6% higher than in 2011. Something tells me that's still too conservative. Middleby's increased its earnings per share by at least 19% in eight of the last nine years. It consistently delivers free cash flow growth. In the past nine years its compound annual growth rate is 23.8%, providing management with the cash necessary to develop new technology and make its acquisitions.
Go to the investor news page at Middleby's investor relations site and there are nine acquisition-related stories since January 2010. I first came across Middleby in August 2008 when it acquired TurboChef Technologies for $160.3 million. At the time of the acquisition TurboChef had a rapid-cook oven that Subway was using in its stores and the technology looked very promising. Unfortunately, it was having a heck of a time selling its residential ovens. I'm not sure whether Middleby's been able to make any headway on the residential front, but there are 100,500 commercial ovens installed at places like Subway, Starbucks (Nasdaq:SBUX), Safeway (NYSE:SWY), BJ's Restaurants (Nasdaq:BJRI) and many other types of food service locations. At the time of the acquisition TurboChef's sales on an annualized basis would have been around $120 million. I'm sure that's grown substantially since. Every acquisition it makes is accretive to earnings. In the last two years it's made nine acquisitions totalling $201.2 million. Its acquisitions will add $400 million in incremental revenue over the next four years. In terms of its capital allocation strategy, it's hard to think of a company that adds greater immediate value for shareholders.
Roth Capital Partners analyst Anton Brenner believes it's the most innovative company in the industry. In fact, he suggests Middleby is actually a technology company that happens to sell commercial food service equipment. A classic example is its Spin Fresh patented technology that spins excess oil off fried food and back into the fryer. The technology works very much like a salad spinner resulting in 50% less oil consumed during cooking, a 14% reduction in gas consumption and a 34% decrease in calories from fat. Investors looking for companies with a wide moat should like the fact it's always innovating. Middleby is developing a "Kitchen of the Future" that uses 30% less energy, requires less manpower, is 40% faster and most importantly, provides consistent food quality. They're not just selling cooking equipment, they're selling greater sustainable profits for restaurant owners. You can't put a price on that kind of value.
The Bottom Line
Two years ago, its international revenue was 18%; today it's 28%. Look for it to make some acquisitions outside the U.S. Whatever it does, its stock will continue to perform marvellously. Since 2001, its stock's increased in value on 10 occasions with the only down year in 2008, when it lost 64% of its value. Since then, its up 250%. Is its stock cheap at the current time? No, it isn't. However, long-term investors shouldn't care. You're buying quality and that hardly ever comes cheap.