The shares of this food equipment manufacturer are being scooped up by hedge funds, with 35 total funds now owning stock in the company.
The Middleby Corporation (MIDD)
From Investor Advisory Service
Last year was challenging for restaurants, as many were closed, and in-person dining was limited. The pandemic-driven slowdown understandably led to a lower level of investment from restaurant owners in new kitchen equipment. As the economy has reopened, the pace of orders for new equipment has improved, which is good news for The Middleby Corporation, a leading manufacturer of commercial kitchen equipment, residential appliances, and systems for industrial processing, packaging, and baking.
The company boasts more than 100 brands across its three business segments and develops, manufactures, and distributes its products worldwide. The bulk of sales come from North America, though approximately one-third of sales come internationally with a presence in Europe, Asia, and Latin America.
The biggest of the company’s three segments is Commercial Foodservice, which is a global manufacturer of commercial cooking equipment. Middleby sells products such as conveyor ovens, ranges, fryers, warming equipment, griddles, and beverage dispensing equipment. Its products are used in restaurants, from quick service to fine dining, as well as in locations like convenience stores, hotels, hospitals, and schools. Customers include many large, well-known names, including McDonald’s, Chick-fil-A, and The Cheesecake Factory.
Importantly, Middleby offers products focused on innovation and technology that allow its customers to save on labor costs. It has invested meaningfully in automation and robotics solutions in recent years. This should be particularly fertile ground in the current environment where wages have been rising and employees have been difficult to find. The Commercial Foodservice segment accounts for approximately two-thirds of the company’s projected $3.3 billion in sales this year. Emerging restaurant chains and international expansion provide two channels for continued growth.
Middleby’s second-largest business is its Residential Kitchen segment. It entered this business in 2013 following the acquisition of Viking Range, which it has supplemented with further acquisitions with the aspiration of becoming the world’s leading high-end appliance maker. This segment makes home ovens, refrigerators, and other kitchen gear and accounts for just under 25% of sales. The company has benefitted from increasing customer interest in professional-style, higher performing appliances in the home. This segment is more sensitive to economic cycles and generally moves with the level of new home starts and home remodels.
The third and smallest segment is Food Processing, which is a leader in preparation, cooking, baking, packaging, and food safety equipment for industrial food processors. Middleby’s breadth of products allow it to offer integrated solutions, and the sales process in this segment is highly consultative due to the technical nature of the equipment. Results in Food Processing have been hurt during the pandemic as most consultation has historically been done in person, where equipment can be demonstrated.
Middleby supplements mid-single digit organic growth with acquisitions, aided by the company’s significant free cash flow generation. The company is an attractive acquirer as it offers a means by which a smaller player can achieve broader distribution and tap into more advanced technology to help with future product development. Including synergies, the company targets getting its cash back from acquisitions within five years. It has acquired more than 20 companies since 2018. Many recent acquisitions have sales and profitability benefits yet to be fully realized. Though not all acquisitions have gone as planned, the company has a history of successfully integrating businesses and realizing meaningful synergies. It has also demonstrated discipline in its M&A process. Middleby’s $3 billion agreement to acquire competitor Welbilt earlier this year was subsequently topped by another suitor. Middleby walked away, pocketing a $110 million termination fee in the process.
Like many others, the company is currently managing supply chain disruptions that could adversely impact shipments, service levels, and production. It is also experiencing meaningful material cost increases, pressuring margins. These issues are expected to hold back growth for the remainder of 2021. Middleby is increasing prices to help manage the cost increases, but pricing actions aren’t expected to contribute meaningfully until 2022. Though these issues serve as near-term headwinds, order trends have remained strong, setting it up for future growth.
We anticipate Middleby will grow organic revenue in the high-single to low-double digit range over the next several years versus pandemic-suppressed results. With acquisitions, we anticipate 14% topline growth. On a more normalized basis, we would expect mid-single digit organic growth, plus acquisitions. Anticipated margin improvement leads to EPS growth of 17% over the next five years, though 10% on a normalized basis.
Projecting 17% EPS growth and applying a high P/E of 28.5, we get a potential high price of 360. Applying a low P/E of 16.0 to trailing adjusted EPS of 6.86 yields a low price of 110. Therefore, we model an upside/downside ratio of 3.1 to 1 and a projected high total return of approximately 16% annually.
Doug Gerlach, InvestorAdvisoryService.com, 1-877-33-ICLUB, November 2021