Middleby Corp.: Cooking Up Growth

| About: The Middleby (MIDD)

Middleby (NASDAQ:MIDD) (62.34, $1 billion, R2000 member) has the kind of chart that one looks at and asks “Why didn’t I find this one 5 years ago?”

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How did this self-described “company engaged in the design, manufacture and sale of commercial and industrial foodservice equipment” pull off a 15-bagger over the past 5 years? MIDD has been around since the 80s – the 1880s. Long a premier name in the stodgy commercial oven industry, the company bet the ranch in late 2001 by purchasing the Blodgett division from Maytag, financing the purchase with debt. This worked out very well and said a lot about the strength and vision of its management team. For investors now, though, is there still money to be made?

I first became aware of MIDD when I read about the company in Investors Business Daily in January. The headline captured my attention (Restaurant Supplier Banks on Rocket Fryer to Eliminate Trans Fats), as getting rid of trans fats seems to be quite a timely capability given the laws being implemented across the country. I began following the company more closely when it made the cut in my initial “Small-Cap Rocket Report” in late March. Having reviewed the company’s investor presentation, I believe that MIDD can ride several viable longer-term themes, including a focus on energy consumption, international expansion and technology (quicker and more efficient). While the company has continued to be quite acquisitive, organic growth in 2006 was 9%. In summary, I find this company to be the kind I like: Strong brands, focused, led by capable management but decentralized operations with plenty of growth opportunities.

Despite the meteoric rise, the company has just 6 Wall Street analysts covering it (Lehman is the only big one). The Motley Fool has been all over this one, though, for years (nice call!). As you can see in the chart below, the stock trades at 19X forward estimates, a tad above its median for the past several years but consistent with the long-term estimated growth rate of 18% and the 2008 forecast of 20% EPS growth. Insider selling has been persistent over the past year, though a lot of it is 10B5-1 related ($42mm of the $52mm). Interestingly, there are no 5% holders (as of 3/31).

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Looking at the financials, the company is underleveraged now despite appearing to have a high debt/cap ratio, with 2006 EBITDA in excess of debt outstanding. Clearly, the company has plenty of gunpowder to continue its acquisition strategy. Inventory growth has been controlled, but AR has been expanding at a rate slightly above sales (related to international expansion). GM at 39 is just marginally above where it was a few years ago and has room to expand as the company continues its supply base shift to Asia. Rising steel prices have been a problem. SG&A has been relatively constant at 20% and should decline over time as the company continues to rationalize its acquisitions.

Technically, the stock is consolidating a 100% run from Q4-06 into Q2-07. It’s not that surprising that the stock would take a breather given the recent pause in positive earnings estimate revisions. Though the 2008 estimate has been steady, numbers came down a bit for 2007 due to higher input costs. The stock pulled back 20% from its all-time high close on 5/3, bouncing at what looks to be reasonable support of the early Q1 highs that served as resistance. The current quote is at the highest volume area over the past year, suggesting that one can buy this one on strength from here.

I would be concerned if the stock were to break 60 (the 150dma), while I would be encouraged on a break to the upside of 66. Despite the recent retreat, the stock has been outperforming the market over longer time-frames and appears to be regaining its relative strength of late. The company reports Q2 EPS in early August, though it hasn’t officially set a date.

Bottom-line: This might be one of the most exciting companies that no one has ever heard of, with the recent pullback related to near-term issues providing a potential entry.

Disclosure: No position