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. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  2. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  3. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  4. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  5. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  8. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center