It was almost a year ago that I first wrote about Middleby (MIDD), when I described the company as "one of the most exciting companies that no one has ever heard of." As of the close Thursday, the stock has declined about 20% from 62+ to about 50.
Over the same time-frame, the Russell 2000 fell about 17% and the S&P 500 fell approximately 19%, so the stock has been a modest disappointment (and quite volatile, making an all-time high just shy of 79 in December before plunging to a low of about 39 in July). Well, on Friday, things are going to most likely change. Actually, they did in the after-hours Thursday, with several trades at 55, up about 10% from the close. I think we could see 62 again, perhaps on Friday.
Before I tell you why this stock could end up about 25% on the day, let me share some background for those not familiar with the story. As I mentioned in the article a year ago, the company sells cooking equipment to restaurants. A lot of it is mundane, but some is exciting - energy savings, efficiency improvement, trans fat reduction.
The company has been run for several years by an extremely dynamic and visionary CEO. It has been very aggressive on the acquisition front, and international growth has been very strong off of an increasingly larger base. The company's valuation has been signficantly lower than historical norms. Shorts have been all over this one - 5.6mm shares short as of mid-July. There is no convertible debt or equity-financed acquisitions pending, so this is a real short. A huge short - the stock trades like 300k per day and has just 17mm shares outstanding.
While I think the shorts are quite wrong, I have to admit to being afraid as a long investor myself (as well as having the stock as a member of my Top 20 Model Portfolio). Here are some of the reasons I believe the shorts have crowded into this one:
- Macro environment challenging for their clients (restaurants, a lot QSR)
- Organic growth weak
- Capital spending can be deferred
- Stainless Steel prices clobbering the company
- Estimates coming down sharply
- Company has heightened integration risks due to large number of deals closed over the past year
- Balance sheet has deteriorated following acquisitions (and share repurchases)
- CEO sold a lot of stock at higher prices last year
It looks like the shorts may be wrong on this one. The company reported a large beat on the top-line, which led to a massive EPS beat: 1.01 compared to .88 consensus. Integrations seem to be going quite well. The call is tomorrow, but the tone of the press release was very favorable.
Here are the reasons I expect a stampede:
- Shorts could cover - if only 20% do, that is over 3X daily volume
- Longs on the sideline scared by macro environment could get involved now
- The stock is very inexpensive
The chart below details several valuation metrics:
The 12.4 PE is at a 5-year low. EV/EBITDA is the lowest it has been in some time and reflects perhaps growth concerns. Even before today, analysts were looking for 20% EPS growth next year.
Disclosure: Long MIDD
This article has 8 comments:
I think that the stock is worth $70 today based upon 16X 2009. More importantly, I expect that the mutiple can increase to 18X next year and expect 2010 EPS to be in excess of $5, perhaps $5.50. The call today went well and reinforced my very favorable views on the strategies and leadership of the company. I actually bought some more stock before and after the call.
MIDD is paying a little under 2X sales, which some have viewed as expensive. I tend to look at Enterprise Value rather than just the equity portion, and one quickly realizes that the lack of debt at OVEN leaves this as a discount to MIDD on this basis. MIDD believes that they can take enough costs out of the business that a $7mm EBITDA loss over the last 12 months would be a $21mm profit.
This is right up MIDD's alley, as they have a long history of successful acquisitions and integrations. OVEN, as Selim says, has "paid the price" to get into some large customers. The products are highly regarded and complementary to those of MIDD. There is little doubt in my mind that MIDD will do a better job than OVEN did with the same assets. MIDD didn't need to do the deal and doesn't do bad deals. I have heard the CEO speak of OVEN on a past call as having products aligned with
Did they overpay? Given how hot the M&A area is for this industry, the company risked waiting in my opinion. I look at the price similar to the way I look at a young pharmaceutical company - this deal is very similar. The best analogy is that OVEN was like a company that had received FDA approval but was just a one-trick pony. Imagine that they had an allergy drug, but their salespeople could only sell that allergy drug. Along comes SGP, with a stable of allergy drugs and other medicines that it markets to doctors and buys the company. Alas, sales take off. SGP incurs much lower overhead than the small pharma company alone incurred in selling the drug. This is likely the same story here. Yes, just looking at profitability certainly makes it look like a risky deal, since OVEN wasn't making money. Even looking at sales can make one question the value. At the end of the day, though, this is an asset purchase, not an operating company buy. I expect the market to figure this out rather quickly.