Background
Selim Bassoul took over as CEO in 2000, when the stock was was trading at roughly $1(split adjusted) and a market cap just under 60 million. Middleby(NASDAQ:MIDD) was a one-stop shop for refrigeration, freezers, cooking, mixers, and food processing. They were spreading their company thin by trying to be the best in everything by attempting to be a turnkey provider to restaurant owners. Customer turnover was roughly 35% per year because 30% of the orders were late due to the high complexity level of the business. The high complexity forced engineers to be over extended and have insufficient resources due to focusing on too many technologies in too many categories. Selim realized that they needed to be focused on their core competency of cooking equipment. After 90 days of being CEO, they disbanded a 1/3 of their business that consisted of periphery SKUs outside their cooking segment.
Management went to the drawing boards and decided to focus on one factor of the hot side of the business where they believed they could be industry leaders. Morgan Stanley showed that over the last 25 years (1975-2000) that utility costs to restaurant owners increase 20% every year. At this point in time, restaurant owners or the chefs making the purchases did not make the utility bill a top priority. Selim Bassoul decided that energy savings was going to be the best strategic move despite the lack of focus at the time. Over the last 15 years, Middleby's extreme energy conscious focus has made them the largest provider of energy efficient appliances in the world with the most energy rated appliances of any company. This has positioned Middleby as the leader in energy efficiency appliances giving them a massive first mover lead. This move was especially strategic now that there has been a huge shift in focus on the energy efficiency of appliances over the last 10 years.
Business
Selim Bassoul has transformed Middleby from a non-existent player into a powerhouse in their three operating segments: commercial restaurant equipment, food processing equipment, and residential kitchen equipment. Middleby is now trading at ~$105 per share with a market cap over 6 billion dollars making the stock a staggering 100 bagger since Selim took over the company. Middleby has over 50 brands and continues to acquire small strategic companies with patented innovative technology. "The company's end-user customers include: ((i)) fast food or quick-service restaurants, ((ii)) full-service restaurants, including casual-theme restaurants, ((iii)) retail outlets, such as convenience stores, supermarkets and department stores and ((iv)) public and private institutions, such as hotels, resorts, schools, hospitals, long-term care facilities, correctional facilities, stadiums, airports, corporate cafeterias, military facilities and government agencies."
Middleby sells products to major multinational customers in each of their segments as well as a myriad of small individual businesses. Middleby operates in the United States, Canada, Asia, Europe, the Middle East, and Latin America, which covers over 100 countries. The scope of operations and extensive customer list mitigates Middleby's geographic and customer risk as no customer is larger than 10% of revenues.
Economic Moat
Middleby has established themselves as the premium player in each of their brands enabling significant pricing power above their competitors. On average, Middleby's products are priced 20-25% higher than their competitors due to their superior durability, technology, and ease of use (discussed later). The vast majority of Middleby products have less than a 2-year payback period thus creating a strong value proposition and high return on investment for customers. The combination of increased food consistency (less waste), reduced cooking time, automation (less employees needed) and the best in class energy efficiency drives the Middleby value proposition.
The global scale of operations makes it difficult for new competition to service the large number of multinational corporations that are part of Middleby's customer base. Middleby not only offers these corporations innovative products, but also the expertise in assessing their current operations and offering solutions to reduce costs and increase efficiency. Middleby can offer multinational corporations the same level of expertise and service across the world leads to a strong moat as new and smaller competitors do not have the global scale needed to service major restaurant chains.
The quintessential facet of their economic moat is their no quibble policy. The no quibble policy originally enacted in 1997, allows customers to return a product for up to 90 days for any reason thus greatly reducing the risk with major kitchen upgrades. This revolutionary policy was extended in 2011 to 1 year, which demonstrates the confidence management has in the their product. Middleby sells $100,000+ kitchen solutions so the fact that customers can return it for up to one year is absolutely incredible. The kitchen equipment will have been beaten up and scratched so it becomes largely unsellable given their premium positioning. The massive "risk" Middleby takes in offering the no quibble policy shows the confidence they have in their products and is exemplified by momentous sales growth over last 15 years.
Middleby is constantly acquiring companies for their technology and how it can work with their current technology to create synergies. The no quibble policy enables customers to more rapidly adopt the new technology Middleby rolls out by taking away the risk in the purchase. The no quibble policy has been monumental in enabling newly acquired technologies to be tested and adopted by customers thus causing quick product rollouts and creating strong returns on acquisitions.
Selim believes the strongest economic moat comes from doing the difficult things that other companies will not do. The no quibble policy is the quintessential economic moat because it is exceedingly difficult on a product and finance side for a business given the sizable price tag Middleby has on their products. The risk Middleby takes by giving the customer hundred of thousands of dollars in product with a guarantee to return within one year is an extremely difficult decision that the competition has not and will not emulate thus creating a true economic moat.
Acquisitions
Middleby has been extremely effective at finding well-run companies with a strong brand and technology that can be integrated quickly to perform strong synergies. Middleby acquires these thriving companies with the intention to keep current management in place and to keep the brand name thus sustaining the brand value. A key factor for acquisition is finding companies with not only competent management, but management that has a true entrepreneur(s) behind the business. Selim wants to find businesses run with strong entrepreneurial spirit who can thrive with the vast resources and strategic expertise that Middleby offers.
The largely autonomous nature that Middleby offers is very attractive to the entrepreneurs selling their companies as it enables them to retain a large portion of control while vastly increasing their resources to further innovation. Another attractive part for many entrepreneurs is that they retain significant control while seeing their regionally sold products quickly become globally distributed. Middleby's global distribution network quickly ramps the sales of the acquired company as the combined technology improves the existing product and the no quibble policy takes away the risk for customers in adopting the new product.
Middleby' unique acquisition strategy and criteria have enabled them to make smart acquisitions, which is especially impressive when considering that nearly 70% of acquisitions fail. Middleby will not make an acquisition for growth, size, or buying a market, which is highly counter intuitive to traditional thinking. Middleby has two main tenants for finding acquisition targets. First, the acquired company has to already be a brand and own a disruptive patented technology that would take multiple years for Middleby to emulate. The second main tenant is that they want a company where Middleby can keep the current management and expand their operating scope. Middleby uses their extensive international sales channels to make the newly acquired companies products available on a much larger scale thus boosting the acquired company's revenue and profitability. On the finance side, the acquisition must be accretive to earnings within 18 months. In addition, the company multiple must be below 5x after five years of operation as part of Middleby. The no quibble policy allows major chains to test the new technology purchased without worry, thus increasing the likelihood these financial requirements to be met.
From 2011 to 2013, Middleby has completed fourteen acquisitions causing the portfolio of brands to increase by 16 brands. The majority of these companies are purchased for 10-30 million dollars thus reducing the risk of a poor acquisition. The major outlier in their methodical acquisition strategy was the purchase of Viking Range Corporation for 361.7 million dollars. Viking enables Middleby to make its first major push into the residential kitchen equipment segment. Prior to buying Viking, residential sales only accounted for 1-2% of total company sales under the Jade and Turbo Chef brands.
Viking
The Viking acquisition is a large divergence from the core commercial restaurant equipment and food processing equipment segments. Viking has solidified their premium status in the residential kitchen market by continually showing superiority in sleek design and industry leading innovation in technology employed. The combination of the best in class commercial restaurant with the best in class residential kitchen segments has already caused major improvements in each of Middleby's segments through improved technology and functionality. The Viking acquisition was the largest acquisition that Middleby has ever made with a purchase price of 380 million dollars. According to Middleby management, they had been pursuing this purchase for 6 years and was finally able to close the deal in early 2013 for the desired multiples due to a recent weakness in Vikings business performance.
Viking was a highly strategic purchase for Middleby for a number of reasons. Viking was the pioneer for providing professional quality kitchen equipment with sleek design for residential cooking equipment. The reputation of quality and technology features that Viking has makes the company a perfect acquisition for Middleby, which prides itself on industry leading technology and only the highest quality products given its no quibble policy. The keystone innovation made possible by the combination of technology is the ability to turn ovens into refrigerators, which sounds like a peculiar idea. This enables the customer to put a meal made the night before into the oven and switch it to refrigerator mode. When on your way home, customers can use smart device (tablets, smartphones) to turn the oven on and the meal will be ready by the time the customers arrives home. This is one example of the many convenience features that Middleby products offer through their outside the box approach to innovation and entrepreneurial culture.
Finance and market opportunity
The timing of the acquisition was highly strategic from a valuation standpoint. Viking's revenue run rate was slightly north of 400 million in 2007 during the housing boom, but was only at 200 million in 2012 at the time of the sale. Management estimates the US residential kitchen market is worth roughly 1.1 billion dollars and believes they can take Viking to a 40% market share. A 40% market share would equate to a 440 million dollar revenue run rate and would make the acquisition highly attractive.
The EBITDA for Viking was at less than 10% at the time of purchase and management believes they can increase EBITDA margin to 20% by 2016, which is in line with current Middleby divisions. This would increase EBITDA by 88 million and would handily meet the financial requirements Middleby lays out for acquisitions. These figures do not take into account any increase in international sales, which would further increase these revenue and EBITDA figures. This is especially attractive given 90% of Vikings sales are US based and Middleby has proven their ability to make their products global given their extensive distribution network. Turning around any company is never certain, but certain factors show significant progress in management's stated goals.
- Cutting Viking staff- Middleby cut 20% of Viking's staff in February of 2013, as they believed they were still overstaffed from their peak revenue in 2007.
- Cutting the number of Viking dealers- from 1700 to 800-900. Dealers will no longer be able to sell outside their geographic areas and they will be responsible for providing the first line of service within those areas. The advantage here is that a higher percentage of distributors will exclusively sell Middleby products. In addition, Middleby will keep only the most strategic and highest volume dealers thus increasing throughput and reducing overall inventory.
- Bringing distribution in house- Middleby recently made a number of acquisitions that has enabled all of the Viking distribution in the US, Canada, and Mexico to be done in house. This has caused Viking revenue growth to temporarily be slowed by this process, and margins have been negatively impacted by selling existing inventory with no manufacturing markup in order to clear the decks for new Viking products in production. I believe this will be a very smart decision long term. Taking distribution in house cuts out the middleman (distributors) in the North American market thus increasing margins. As North America represents 90% of sales for Viking, I believe this will be a meaningful step to getting to the stated 20% EBITDA margin.
Revenue for Residential Kitchen was 66.3 million for Q3 2014, which was an increase of 14.3%. This annualizes to 265.2 million with the vast majority of these sales coming from Viking thus showing the progress on management's goal. The Middleby purchase has bumped residential kitchen revenue from 1-2% in 2012 to 16.5% as of the most recent quarterly report. The stated goal of 440 million in revenue run rate would bring the residential kitchen equipment to 27.2% of the current revenue by Middleby thus greatly diversifying revenue. This does not account for the time needed to grow the residential kitchen segment by 174.8 million dollars, but gives some scale to the upside potential of Viking and continued revenue diversification. Significant progress has been made already with the 265.2 million residential kitchen run rate as it was just above 200 million in early 2013 with the Viking acquisition.
Industries
Middleby operates in three large segments and has made meaningful strides to take market share. The company believes that the worldwide commercial food service equipment market has sales in excess of $20.0 billion. Management estimates that the cooking and warming equipment segment is more than $1.5 billion market in North America and $3.0 billion worldwide. As previously stated, the US residential kitchen equipment market is estimated at $1.1 billion with a large potential international market. Middleby has also made movement into the cold side (refrigeration, cold-rooms, ice machines, freezers) with their Celfrost acquisition. The Wunder-Bar acquisition has made Middleby a player in the beverage dispensing market. Management has not given estimates on the size of these new markets, but could lead to meaningful runways for growth. Middleby operates in numerous large industries where it could significantly increase their market penetration.
Customer Base
When Selim Bassoul took over as CEO in 2000, Papa John's, Dominos, and Pizza Hut accounted for 60% of total revenue. Middleby's products now service a massive number of customers, many of who are global in scale. The most notable customers of Middleby are McDonalds, Starbucks, Kroger, Chipotle, Panera, Chili's, Nabisco, Papa Johns, Dominos, Kraft Foods, Costco, Hormel, Sam's Club, Seven Eleven, Dunkin Donuts, and KFC among many others. Selim Bassoul has done an incredible job to diversify revenues over his 15-year tenure as CEO.
Currently no customer accounts for more than 10% of total sales thus creating a high level of diversity in revenue. This creates a low level of customer risk where losing 1 key customer would significantly hurt the company's solvency or even near term financials. The large scope of products Middleby sells from their roughly 50 divisions represents another valuable form of revenue diversity. Middleby has done a great job diversifying their revenues geographically. International revenues increased 56.25% from 2011 to 2013 proving a strong growth trajectory in foreign markets.
North America and Canadian sales increased 71.14% over this same period, but this figure is distorted from the Viking acquisition that added 200 million in revenue (Viking sales are predominantly in North America). Assuming no major North American acquisitions, international revenues should continue to outperform domestic sales, thus further diversifying sales geographically.
Technology
Middleby has a number of incredible patented technologies that makes their products features far superior to their competition. Middleby's technology moat is best exemplified by their zero preheat ovens, Skyflow, waterless steamer, and WOW oven technologies. These are only a small number of the revolutionary features Middleby has throughout their expansive and growing product lines.
- Zero preheat on all Viking ovens- There features skips the 15 to 20 minutes preheat feature on a conventional oven. The new Viking ovens will start cooking your food within 1 to 2 minutes thus cooking food much quicker. This is a highly disruptive innovation that makes the Viking ovens much more efficient than competitors product offerings.
- Skyflow- took their Wunder Bar acquisition and pushed them to use their core competency in dispensing soda to create a system for dispensing liquor. Bartenders giving away free drinks and keeping the tips from those drinks kill margins at restaurants. The Wunder Bar liquor dispensing system safe guards this system by automating the pouring process. This takes away the temptation for a bartender to give away free drinks to friends in exchange for a large tip. Liquor is a very high margin seller, but bartenders giving away free drinks takes away the profitability for restaurants thus causing the product to garner significant interest from many large restaurant chains.
- Waterless steamer- Red Lobster is the largest user of steamers in the world and previously used 350 million gallons a year using a traditional steamer. Red Lobster challenged Middleby to come up with a steamer that reduces amount of water being used. Middleby was able to create a steamer that uses no water at all as part of their Turbochef division. This product was so disruptive that it was rolled out to every Red Lobster starting at the year-end of 2013. Middleby then used this technology to create a water-less steam table that is being rolled out by the largest Chinese food chain. The adaptability and value of these products creates a significant technological moat for Middleby's current competitors and a larger moat for new competition. The waterless steamer is another cornerstone to Middleby's long stated goals of innovative energy efficient items that help impact on the environment.
- WOW oven- The new WOW oven predominantly used for cooking pizza can cook a large pizza in 90 seconds. The incredible efficiency and quality of the cooking has caused the WOW oven to be the gold standard among fast food pizza chains. The WOW oven is in every Papa Johns across the country as well as in a majority of Dominos and Pizza Huts. This bodes well for Middleby as pizza is a staple in the growing fast food industry.
Financials
Middleby is trading at roughly 30 times trailing earnings, which is at the high end of their 5 year P/E valuation. This is significantly higher than stocks I typically consider to be sound investments as I typically follow a growth at a reasonable price strategy when picking stocks. Middleby is one of very few companies that has proven to be worth buying at almost any valuation multiple over the last 10 years. Middleby's large economic moat, competent management, patented and innovative products, and multiple catalysts make me feel confident that Middleby will continue their track record of success. While past results are never a guarantee for future success, the level of revenue, earning per share, and EBITDA growth are not anomalies as proven over last 10 years.
Revenue has grown at an incredible rate over the last 10 years. Revenue has grown from 316.7 million in 2005 and to 1,579 million in 2014. This represents a growth of 398.5% in the last 10 years, which is simply astonishing. As Middleby continues to grow, it will become increasingly difficult to replicate this hyper growth. With that being said, I believe Middleby can sustain double-digit growth over the medium term due to strong industry dynamics, increased penetration through superior products, and acquisitions.
The most impressive part of Middleby's revenues over the last 10 years is that revenue only decreased by 5.7 million in 2009 (the heart of the financial crisis). This represents a growth decline of less than 1% during one of the worst economic environments in modern history. This is a strong indicator of the strength of their products and their ability to weather economic downturns when virtually every company has suffered major loses in revenue. Strength in sales during economic downturns coupled with thriving revenue expansion during more stable economic environments proves Middleby has been able to operate successfully in any economic condition.
Profitability measures over the last 10 years have slightly exceeded revenue growth, which is key indicator of financial strength when significantly scaling operations. Gross profit has grown from 121.7 million in 2005 to 622.3 million in 2014. This represents growth of 411.3% growth over the 10-year period. Earnings before interest taxes depreciation and amortization (EBITDA) has grown from 64.6 million in 2005 to 346 million in 2014. This represents growth of 435.6% over the 10-year period.
Gross profit and EBITDA outpacing revenue growth indicates the strength of their pricing power, as Middleby did not have to significantly discount products to obtain growth. This is especially important as Middleby is a premium player in all of their product lines with an average selling price of 20% higher than competitors. This higher price should be sustainable in the future due to their superior features, quality, and no quibble policy.
(Source: Morningstar)
The bottom line is that Middleby is not a cheap stock by current valuation multiples as it continues to have significant stock price runs. Any price decline of 10-20% ($80-90 per share) would be an advisable entry point for investors looking to take less valuation risk. With that being said, Middleby has shown relatively few significant drops in its stock price over the last 5 years. I have missed multiple stocks that I strongly believed in their future success, but valuation stopped my willingness to buy the stock thus missing significant price increases. Middleby was the first stock that I bought despite higher multiples than I am normally comfortable with and I have been rewarded thus far. My long investing horizon and confidence in the company makes me believe Middleby will "grow into" the current valuation and create significant alpha over the broader market.
Catalysts
- Higher minimum wage- A higher minimum wage makes Kitchen of the Future look more attractive as automation decreases the amount of employees needed. There are currently 1,500 to 1,800 kitchens in the U.S. currently testing the concept thus creating significant opportunity. Restaurants have not adopted the brand-new kitchen concept as quickly as had been anticipated, as it is uncertain if changing menus will be compatible with the Kitchen of the Future. While the delays have been longer than expected, the concept is sound and higher minimum wage should push restaurant chains that are hyper-focused on the bottom line to implement this technology.
- Market Trends- Management believes there is a large opportunity due to a large push in higher quality of food thus creating a need for Middleby's safe guards in their food-processing segment. There is also a large opportunity in pre-cooked meals in China and India as there is a push for better food processing equipment being used in the preparation of these foods.
- Beverage dispensing equipment and cold side- Both of these markets are relatively small portions of Middleby's business, but represent possible pathways for growth and an opportunity to further become a one-stop shop for multinational company's needs.
- Increased sell side coverage- additional coverage will increase awareness on a remarkably successful stock. The additional coverage should create a larger basis on investors who will buy the stock or put on their watch list. At a market cap slightly north of 6 billion, it is only a matter of time before this hidden gem becomes a household name among growth investors.
- Improvements at Viking- Management took responsibility for poor earnings numbers largely due to a shift in lower margin residential kitchen sales. This was compounded by significantly higher than expected warranty expenses on the Viking line. While it is disappointing to see such high warranty costs, getting a large newly acquired company to a standard compatible with their no quibble policy is difficult. I expect these costs to be fully diminished by the second half of this year, which should help increase earnings considerably.
Risk Factors
Selim Bassoul as the backbone of the company-
The decentralized nature of Middleby minimizes this risk as the company is characterized as a number of individual silos still often run by the founders or original management team. Losing Selim would be a huge hit on a larger scale, but the culture created at Middleby would still enable the creative environment where divisions are producing new disruptive technology. Many of these innovators who came as part of acquisitions have been with the company for nearly a decade or more and understand Selim's management philosophy and already have the innate entrepreneurial spirit that enables Middleby to thrive.
Selim Bassoul has been selling shares-
Selim Bassoul had been historically had a massive share of Middleby's shares outstanding. He has been dumping a significant amount of shares over the past year, which can be seen as a red flag. While I certainly would like to see him own more shares, he is still paid predominantly with shares tied to high performance metrics. This keeps the shareholder and management aligned, which is a key for companies I own. Selim Bassoul still has 63.3 million dollars in direct and indirect shares thus still having considerable skin in the game. It is also hard to criticize wealth diversification amidst massive share price increases.
Large acquisition strategy-
Continual acquisitions should be a red flag for investors when analyzing the vast majority of public companies. Roughly 70% of acquisitions fail due to large good will write offs or proposed synergies never coming to fruition. Middleby has had strong growth organically, but their remarkable results are largely a function of continual acquisitions. Poor acquisitions in the future could pose a large threat to Middleby's future prospects and hurt the ability to fund additional operations. The threat of poor acquisitions could be further validated by the departure of CEO Selim Bassoul as he has largely been the visionary behind Middleby's impressive acquisition strategy.
High Valuation Multiples
High valuation multiples are largely covered in the financial section thus will not be covered again. The higher the company's valuation multiple, the riskier it becomes with all other factors equal as a rule of thumb. Middleby is trading at a significant premium to the broader market thus creating valuation risk.
Other considerations
- Middleby has very dedicated and loyal customers many of who have used their product for so long that they often do not have the insight to offer a completely new viewpoint on how the technology/product can be improved. Selim Bassoul spends his time talking with customers of competitors seeing what they do right and what they do wrong. This approach enables Middleby to apply the best features or characteristics of their competitors, while avoiding many of their competitor's mistakes. This creates a situation where Middleby is able to use the best in practice technology and consumer practices from an industry perspective versus utilizing only the best ideas for Middleby management. This interaction leads Middleby to find companies with most innovative technologies/techniques used in each of its segments. Middleby often acquires these companies or best imitates their practices or technology to further increase their total product offerings.
- Blue-Collar workers represent 60-80% of staff, and they are responsible for the bending of steel, assembly of products, and final checks before products are released. Selim created a culture where workers who think designs on products are poor or could be improved can stop the production line and "start a rebellion" with the engineer. This creates an environment where workers are empowered, directly involved in the larger picture of the products, and have stronger attachment to their work leading to high employee retention rates. Middleby has a 98% employee retention rate due to the outsider approach the company has with their unique culture.
- Middleby gives their employees a lot of autonomy and offer huge incentives to increase alignment in interests (keeps entrepreneurship culture in acquired businesses).
- The philosophy is to run Middleby as a company with no uniform policies for practices in a low bureaucracy environment. Middleby simply empowers the employees and gives them the resources needed and lets the employees figure out how to best implement a task or design a product. This philosophy seems reminiscent of how many of the best technology companies are run in an effort to increase creativity levels. The fact that the company culture thrives around self-directed employees in the commercial kitchen, food processing, and residential kitchen segment is an incredible feat.
- Middleby encourages all employees to voice their opinion on how to improve processes or decrease costs. One example was a clerk in the accounting division who noticed the massive number of federal express mail that Middleby sends each day. The cost per year totaled $180,000 and most of the mail was not urgent enough to dictate being federally expressed. The federal express mail was then cut by 2/3 thus causing a $120,000 savings for the company each year.
Other Financial Considerations
- Management frugality extends to every aspect of their internal business and management expenses. All of the management team has to fly coach when traveling and using Hampton Inn's when lodging. The extreme dedication to efficient use of company money is a rare quality seen in any major public companies these days.
- Selim personally oversees every capital allocation decision over $25,000 thus increasing his determination over smart efficiency with capital.
- Middleby's extreme focus on innovation has caused 85% of their divisions to disrupt their own current technology every 3-5 years. This culture of disrupting their industry leading technology is rooted in their entrepreneurial culture. Major new features are constantly being rolled out in their products across nearly every division.
- Every employee is entitled to $2,500 in profit sharing when EBITDA numbers are hit for each of the ~50 divisions. Selim hopes to bring the profit sharing to $10,000 by the time he retires as it creates employee and management interest to be aligned.
Customer Feedback
Ed Rensi, acting CEO of Famous Dave's, the barbecue chain, offered some insight into how restaurant operators look at Middleby's fully encompassing product offerings:
There's a company in Chicago called Middleby Corporation which has some of the best restaurant technology in the world, and they are partnering with us to do a complete analysis of our kitchen as to new cooking techniques, new cooking systems, with the objective of reducing labor, making our products more consistent and delivered to the consumer with a higher level of quality, reducing utility costs, eliminating the use of natural gas to the extent we do today and so on and so forth. So kitchen efficiency becomes very important because the more efficient our kitchens are, the less square footage we need in those kitchens. And with our occupancy costs being what they are, a smaller kitchen really improves our store-level economics going forward.
Thesis
Middleby not only sells the best in class equipment, but goes into customers or potential customers chains and offers their analysis on how to improve consistency, increase energy efficiency, and reduce kitchen space. The expertise Middleby offers enables customers to have significantly lower energy bills as exemplified best by Red Lobsters waterless steamer. Smaller kitchens lead to better store-level economics, as a restaurant needs less space to serve the same number of customers causing less overhead in property acquisition and taxes. These savings make locations more profitable thus causing more store locations to be feasible by the particular chains return on investment standards. This causes chains to have a larger pipeline of store locations using Middleby's technology creating a highly synergistic relationship.
Middleby is a truly unique company that affects almost all of our lives through their multitude of products that cook or process food across the world. The no quibble policy, superior product offerings, and large range of patented industry leading technologies gives Middleby a significant economic moat. Illinois Tool Works and Manitowoc operate numerous segments unrelated to building kitchen and processing related equipment making their focus fragmented. Middleby's dedication to building the best in breed kitchen and processing equipment should enable them to further their economic moat. Management has proven their competence to execute on their stated goals over the last 15 years and this should continue for the foreseeable future. Middleby is not a cheaply valued company, but I believe they can continue to grow market share through their unique entrepreneurial culture. My long investing horizon and confidence in the company makes me believe Middleby will "grow into" the current valuation and create significant alpha over the broader market.
Sources:
Morningstar
http://www.fool.com/investing/general/2013/07/21/how-middlebys-warranty-makes-them-a-leader.aspx
Middleby 10-K, Conference Calls
J3sg.com
