I listened again to the conference call: I think they said that "over half" of the Q1 earnings came from acquisitions? If I heard correctly (should be about minute 36) then they have falling margins on flat sales. Here's how: Q1 EPS was $0.77, so $0.39 or more came from acquisitions, and $0.38 or less was from the business they had one year ago. EPS a year ago was $0.68. That implies that the existing business saw EPS fall >44% from a year ago. They seem to have a rather fancy P/E for that kind of negative earnings growth on core business, no?
Now, what is it that allows acquired businesses to contribute only 1/3 of sales but over half of earnings, even though those business have lower gross margins than the existing business? Isn't that a red flag? Tyco, for example, always made tons of money from acquired businesses -- but that was based on a GAAP accounting scam by deferring target company sales until after the acquisition closed, and from marking down inventory at acquisition generating free earnings upon its sale, and shoving that portion of the acquisition cost into goodwill, which under GAAP ove course is never expensed. I'm not saying that MIDD does that kind of stuff, but it smells badly enough to me that I'm going to start doing some real work here . . . Their 10-Q cash flow statement will deserve some extra special attention, but necessarily will be a noisy read because of the acquisition accounting.
Further, didn't they telegraph that business conditions now are really lousy, and that sales will be weak? That their customers are sucking wind and can't spend money? Aren't they merely a capital equipment supplier to an industry that now suffers from overcapacity?
And, didn't they just pay 9.5x EBITDA for a big debt financed acquisition just before the country falls into recession (therefore, they paid 9.5x on peak earnings)?
Lastly: shorts, as an investor species, are not stupid. Not always right, for sure (who is?), but they are not stupid.
I listened to the same conference call and did not get the doomsday situation you are painting here at all. Here are some of his statements and other info that should give shorts some pause:
1) Earnings for 2008 will not be 25% YOY higher as previously planned, but 18-20% higher. That means they are projecting earnings for 2008 of 3.70-3.77. They have a PEG of less than 1, not a fancy PE by any stretch. Your deduction that organic earnings went down from 0.68 to 0.39 is simplistic at best. One has to peer into the details of what went into each of these earning reports before making a blanket statement like 40% reduction in organic earnings.
2) Selim also said that they are on a roadmap to grow earning on an aggregate of at least 20% over the next three years.
3) MIDD grows by acquisition and using its marketing and management muscle to improve the acquired companies bottom line. For example, the two recent acquisitions in Europe – Giga and FriFri. Giga makes ranges, ovens, and steam cookers. These were acquired for $23.5M. Together they have annual sales of $35M and currently run at 5% EBITDA margins. These are the typical type of Middleby buys. The company expects to improve EBITDA margin to 10% by the end of 2008 and run at around 15% in 2009. Star is also showing some improvement. It was at $100M revenue run rate and 20% EBITDA margins when acquired. They will push these margins to 25% by the second half of the year. Revenue contribution will be slightly below $100M as some unprofitable product lines are eliminated. The four other 2007 acquisitions are approaching 15% operating margins and will reach or exceed that later in 2008.
4) MIDD has not delivered below street EPS expectations in the last 8 quarters.
Think before you join the hordes shorting this stock.