I've followed restaurant and food service equipment provider Middleby (Nasdaq:MIDD) for a long time now, and the stock has never been what a value investor would call "cheap." That's unfortunate, as this is an uncommonly interesting growth story in a segment of the market where growth investors don't often go shopping. While I would not chase this stock, I would recommend that investors keep it on a watch list and take advantage if and when a pullback comes around.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Another Beat, Another Raise
Middleby continues to do well in what remains a difficult restaurant environment. Revenue rose 25% as reported this quarter, though organic growth was more on the order of 5%. Even at that relatively modest growth rate, though, Middleby stacks up well with established rivals like Illinois Tool Works (NYSE:ITW), Dover (NYSE:DOV) and Manitowoc (NYSE:MTW).

Due in part to a mix shift towards more food processing sales, margins suffered. Gross margin dropped about a point from last year, while operating income rose 17% and operating margin also dropped by around one point.

SEE: A Look At Corporate Profit Margins

Waiting For More Deals
Middleby has been a remarkably active acquirer throughout its corporate history, and the company seems to have a winning formula. Middleby typically targets companies with around $20 million in sales, but the company has been less active this year. Middleby bought Turkington, a maker of automated baking equipment, back in March, but has been relatively quiet since then.

Given how many significant technologies the company has bought-in over the years, including its spin fry technology and ventless cooking systems, I doubt that the company is done.

SEE: Biggest Merger And Acquisition Disasters

A Good Mix and a Growing Reputation
All in all, it's hard to describe the restaurant industry as healthy outside of quick service restaurants (QSRs) like McDonald's (NYSE:MCD), Yum Brands (NYSE:YUM) and Wendy's (Nasdaq:WEN). That said, chains seem to be faring better than most, and about 60% of the company's sales come from chain restaurants.

I think this is noteworthy, not only for the relatively greater financial stability of chains, but also as an emerging trend in the industry - more and more chains are announcing menu overhauls and store refurbishments, and that introduces the opportunity for Middleby to sell more new equipment. At the same time, the company is building a reputation as a go-to vendor in many key equipment niches.

SEE: Top 5 Fast Food Value Menu Deals

The Bottom Line
There are a handful of valid objections to the Middleby growth story and valuation. First, it is quite evident that Middleby has bought a lot of its growth. While its organic growth rate still compares well to many established names in the industry, the market does not reward mid-single-digit revenue growth stories with double-digit EBTIDA multiples. Consequently, Middleby must continue to identify and execute on growth-stimulating deals.

Also, the company's acquisitiveness comes at the cost of its balance sheet. Although Middleby's debt is not too worrisome relative to its cash flow, and the company's return on capital suggests debt-funded acquisitions are value-accretive, investors have been burned before by debt-funded acquisition-fueled growth stories.

I'm frankly comfortable with how Middleby runs its business, but I'm less comfortable with today's multiple. The company may well generate low-teens compound free cash flow growth for the next decade, but even that level of growth doesn't support a fair value high enough to make the stock appealing today. Consequently, Middleby remains an interesting stock to own, but not one that I'd buy without a pullback first.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    Factors Driving Kroger's Success

    Kroger’s focus on optimizing customer experience and cultivating its own product lines has proven to be successful strategy.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!