The Middleby Corp (MIDD)

TMF1000 (99.07) Submitted: 9/11/06 4:16 PM : Start Price: $37.96 MIDD Score: 47.77

The Middleby Marshall Oven Company was founded in 1888. It was acquired by TMC Industries Ltd in 1983. The combined entity changed its name in 1985 to Middleby Corporation. The company has had a long record of survival.

Middleby believes they are one of the largest multiple-line companies in the US. This represents a big opportunity as companies upgrade to more modern equipment. Among the company's major competitors are Enodis plc; Vulcan-Hart Corporation, a subsidiary of Illinois Tool Works Inc.; Wells Manufacturing company, a subsidiary of United Technologies Corporation; Zanussi, a subsidiary of Electrolux AB; and Ali Group.

According to Selim Bassoul said there is a piece of Middleby equipment in one out of three restaurant kitchens in the world. The company has produced many new products such as a pizza oven that cooks 25% faster. These releases are very important. It gives them the potential to grow as competing restaurants upgrade to remain competitive. We can also assume they will continue to furnish products for growth at popular restaurant chains as they continue to grow. Can they continue to place a piece of equipment in every third restaurant? Regardless, this is a very good source of growth.

The company reckons that one of every three cooking machines used in a commercial U.S. kitchen is one of its brands. Source Chicago Business Tribute

They have their equipment in many of the fastest growing chains. This allows on to invest in the future of the restaurant business without picking the best restaurants. They have equipment in many of the fastest growing and some that probably are not growing so fast. But for each new restaurant these chains open, they are far more likely to buy their ovens from Middleby. This gives them excellent growth potential.

The company regularly introduces new ovens into the market. One of the improved features is their ability to cook faster and save energy. The typical Pizza restaurant can spend $600 to $700 on energy a month to use their power ovens. If MIDD can help them save 2/3 on their energy bills, it goes a long way to convince people to replace their ovens. This is an important point because I found out that MIDD ovens are extremely durable.

It is estimated that out of the 120,000 ovens sold in the last 25 years 100,000 are still in operation. this durability may slow customers repeat purchases. However promises to sell ovens that can reduce expenses significantly will no doubt convince many to upgrade. Eventually it will pay for the exchange, not to mention the newer ovens cook faster. One Pizza Hut? franchise operator said, ?I was skeptical that the oven did what they said it did, at first, but after testing one, he plans to switch several ovens over this year.    

Dominoes and Papa Johns both pizza companies that depend on faster cooking times have been mentioned as customers. So, beside energy saving a company that can deliver faster cooking times is a hit with fast food restaurant. The new Wow! ovens have these sought after features and has been a bit hit for Middleby.

In 2005, the commercial restaurant industry expanded by 4%, but Middleby revenues went up 17% and earnings grew 32% to $3.98 a share. On august 3rd, 2006, their second quarter 2006 earnings report was announced and they reported 25% sales growth and earnings grew 20.7% to $1.34.

They have debt due to buying the large number of shares from the retiring chairman and his family. But they bought these shares below the market price as the time. This is the way you want to buy shares. It did raise debt but it also significantly reduced shares outstanding.

This second quarter, they reduced debt by about $12 million. They produced about $12.877 million in cash flow in the first six months of the year. TTM earnings are $4.39 which gives them a PE ratio of about 17.27 which is below the market average for small cap stocks and just slightly above the PE ratio of the entire Russell 2000 based on future earnings. If we use MIDD earnings estimates we get a forward PE of 13.69 far below the market average of Russell 2000 stocks. And the company growing by 20%.

I believe the market has as usual dropped the ball on MIDD. I like them at this price. I think debt is the only issue and is the reason the shares are selling so cheap. As they pay that off, the share price will rise. And they are paying it off each quarter.

The next earnings report will be around Novemeber and I expect higher prices at that time. The company new faster cooking ovens and energy saving ovens are likely to induce other restaurants to switch to MIDD ovens. As restaruants grow their storebase, MIDD will grow. I believe this to be a remarkable growth story.

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