Oven-maker Middleby (NASDAQ:MIDD) has a record of rising earnings and a strong cash flow. The company recently posted its 26th consecutive year-on-year gain in quarterly earnings, and net income rose 36% in Q2. Yet, the stock fell from $78 at the end of the year to the upper 30s in July, and has only recovered as far as the mid-50s. Short trades make up almost 35% of the 16M share float. According to Barron's, this could be a good opportunity to buy the stock at a reduced price.
Those who are bearish on Middleby argue that its earnings will be hurt by growing debt, rising costs and a slowing U.S. economy. However, casual-dining restaurants, where growth has indeed slowed, account for only 9% of Middleby's revenues. Costs have risen but so has the company's cash flow. Sales growth has averaged 22% over the last five years vs. the industry average of 15%. Gross margins have remained high and return on invested capital in H1 was a respectable 14.7%.
More than 33% of Middleby's revenue comes from replacing equipment for existing customers. With new product lines available and added efficiencies, store owners often have plenty of incentive to upgrade. Another third of its sales are generated from the recent trend towards more healthful diets. The rest of revenues come from new store openings, which should continue to grow as new restaurants operated by Middleby customers are opened in Asia and other international locations.
Middleby has been on a buying binge, most recently acquiring oven maker TurboChef (OVEN) for $6.47 a share, and its debt has reached $274.6M. Middleby CEO Selim Bassoul insists Middleby's cash flow is more than strong enough to cover the debt. Thanks to the large short position, any positive surprises could bump the stock price up. With Middleby's revenues dependent on a diverse base, unexpected good news could come from anywhere.
- Anton Brenner, an analyst at Roth Capital Partners, rates the stock a Buy with a price target of $95.
- Peter Lisnic of Robert W. Baird rates Middleby as No. 1 or No. 2 in nearly all of its product categories, and has a price target of $81.