The Middleby Corp (MIDD)

TMFInvestorpoet (82.27) Submitted: 1/23/08 3:18 PM

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The History

The table below demonstrates the revenue and earnings growth that Middleby has achieved over the past three years. More impressive to me is the steady margin improvement despite taking on new acquisitions. Long-term debt has been declining, though the next quarter’s balance sheet will look a bit different following the rather large New Star acquisition.

(see table here: http://www.poeticportfolios.com/?p=29)

In order to develop a current owner earnings number, I have also compiled a table demonstrating the last four quarters of financials. You can see in this table that margins do fluctuate throughout the year as acquisitions are integrated into the company. This often involves product lines being discontinued so that the company can focus on higher margin products.

(see table here: http://www.poeticportfolios.com/?p=29)

The trailing twelve months earnings are $48.4 million, but looking at 2006 year-end numbers, you can see that capital expenditures are less that depreciation and amortization by $2.6 million. Because of this, I am adjusting the starting owner earnings up by $2.6 million to an even $50 million. Depreciation expense should outpace capital expenditures as goodwill from acquisitions are depreciated.

Valuation

My intrinsic value assumptions assume $50 million in starting owner earnings, a reversionary PEG ratio of 1.35, and a 10% discount rate. Much of the growth in Middleby depends on the successful integration of acquisitions. Organic growth is often limited to 8-12%. At times their earnings growth may exceed 20%. The New Star acquisition should limit any new acquisitions, but margins from New Star should drive earnings growth if not revenue growth. Because of this, I have used a 9-21% range of 5-year growth rates in the table below.

(see table here: http://www.poeticportfolios.com/?p=29)

Given Middleby’s operating history, a 15% growth rate appears reasonable for this company. This results in a value of $94 per share. A 25% discount to this value results in a $70 per share value. There is certainly a risk that acquisitions do not go well in the future or that none are available. Both of these situations would result in slower growth, tending toward a $50 per share value.

Conclusion

There is still a good deal of upside left on Middleby despite the multi-year advance of its share price.

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