We have issued an updated research report on The Middleby Corporation MIDD on Nov 22.
The company, with a market capitalization of $6.4 billion, currently carries a Zacks Rank #3 (Hold). It specializes in manufacturing cooking, warming, food preparation and packaging equipment, especially meant for use in industrial processing, commercial and residential markets.
Many tailwinds and headwinds are impacting its performance. Let’s delve deeper.
Factors Favoring Middleby
Operating Conditions: The company operates through three segments — Commercial Foodservice Equipment Group, Food Processing Equipment Group and Residential Kitchen Equipment Group.
Middleby anticipates acquired assets, expansion in international businesses and effective marketing initiatives to aid Commercial Foodservice Equipment Group. Also, it expects technologically-advanced products and solutions as well as the increasing adoption of ventless cooking equipment to be beneficial.
In addition, Residential Kitchen Equipment Group will likely gain from Viking products as well as focus on product introductions and residential showrooms. Product launches and innovation investments might aid Food Processing Equipment Group.
Buyouts: Middleby has been benefiting from acquired assets. In 2018, it added Hinds-Bock, Ve.Ma.C, Firex, Josper, Taylor, M-TEK, Crown Food Service Equipment and EVO buyout assets to its portfolio.
Middleby acquired Cooking Solutions Group of Standex International Corporation SXI in April 2019. Since then, the buyout has been fortifying Middlebys’ portfolio of cooking products. In the same month, the company acquired Powerhouse Dynamics, adding more value to its Connect IoT platform.
Thereafter, Middleby bought Ss Brewtech in June and Packaging Progressions in July. Recently, the company acquired Brava Home. The buyout is expected to expand Middleby’s product offerings in residential and commercial markets.
Earnings Estimate Trend: The company reported better-than-expected results in the third quarter of 2019, with earnings surpassing estimates by 5.52%. Its average earnings surprise for the last four quarters was a positive 3.03%.
Going forward, the company stands to benefit from the focus on product innovation, improving selling techniques, solid offerings to customers and focus on growth markets. Also, various profitability actions will likely be beneficial.
Earnings estimates for the company have been raised in the past 30 days. The Zacks Consensus Estimate for Middleby’s earnings is pegged at $6.74 for 2019 and $7.43 for 2020, suggesting growth of 3.4% and 1.2% from the respective 30-day-ago figures.
The Middleby Corporation Price and Consensus
The Middleby Corporation price-consensus-chart | The Middleby Corporation Quote
Factors Working Against Middleby
Share Price Performance: The company’s shares underperformed the industry, reflecting that market sentiment seems to be working against it. In the past three months, its shares have gained 6.6% compared with the industry’s growth of 12.9%.
Also, Middleby’s shares currently seem overvalued compared with the industry, using the EV/EBITDA (TTM) valuation method. The stock’s three-month EV/EBITDA multiple is 13.18x, higher than the industry’s 13.08x. Also, the stock is currently trading higher than the industry’s three-month multiple of 13.13x. This makes us cautious about the stock.
Top-Line Weakness: The company’s third-quarter 2019 top-line performance suffered from the absence of large customer orders within the meat processing business, difficult conditions in the U.K. (primarily related to the Brexit) and weakness in the domestic appliance business.
For 2019, Middleby remains wary of certain headwinds. It expects weak spending by restaurant chains and Brexit-related issues to hurt its Commercial Foodservice Equipment Group. Also, woes related to meat processing might affect Food Processing Equipment Group, and international uncertainties might hurt Residential Kitchen Equipment Group.
Costs, Forex and Debts Woes: Rising costs and expenses have been affecting Middleby for quite some time now. In the third quarter of 2019, the company’s costs of sales increased 0.4% year over year, and selling, general and administrative expenses grew 2.2%. Notably, material cost inflation (on account of tariffs) was a spoilsport though pricing actions came in as a relief.
Further, international diversity exposed the company to geopolitical issues and unfavorable movements in foreign currencies. In the third quarter of 2019, forex woes adversely impacted its sales growth by 1.1%. Also, the company has a highly leveraged balance sheet, with long-term debt of $1,955.9 million at the end of third-quarter 2019.
Persistence of such issues might be concerning for the company.
Stocks to Consider
Two better-ranked stocks in the same industry are Tennant Company TNC and Dover Corporation DOV. While Tennant sports a Zacks Rank #1 (Strong Buy), Dover carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for both companies have improved for the current year. Further, average earnings surprise for the last four quarters was positive 28.65% for Tennant and 6.70% for Dover.
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