Is This Cooking Equipment Maker Cheap?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Middleby Corporation (NASDAQ: MIDD) just recently announced that it would acquire Viking Range, the leading premium residential cooking equipment and kitchen appliance manufacturer, for $380 million in cash. It reported that the annual revenue of Viking was around $200 million, thus the deal was valued at 1.9x sales. Should Middleby become more attractive after this deal? Let’s dig deeper.

Business Snapshot

Middleby, founded in 1888, is known as the leading maker of cooking and warming equipment used in restaurants and kitchens. The majority of the company's revenue came from the Commercial Foodservice segment, about $723 million, accounting for nearly 84.5% of the total revenue in 2011. Middleby has implemented its strategy to grow via a series of acquisitions for those two business segments. In the past 3 years, Middleby has completed more than 14 acquisitions to add to their brand portfolios. In the Commercial Foodservice Equipment segment, the company’s customers are quick service restaurants, full service restaurants, retail outlets, and other institutions such as hotels, schools, etc. No customer accounted for more than 10% of its net sales. The customer diversification is the same with the Food Processing Equipment segment, and the customers in this segment were mainly the producers of pre-cooked meat products and of baked goods. 

Historical Sustainable Growth

In the past 10 years, Middleby managed to grow its revenue consistently, both organically and via acquisitions, from $229 million in 2002 to $856 million in 2011. Its net income followed the same rising trend, from $17 million in 2002 to $95 million. In 2002, its EPS was only $0.34, and it has increased up to $5.15 in 2011, with the roughly similar amount of total shares outstanding. In the last 10 years, its return on invested capital has been double-digit. Trailing twelve months, the net margin was 11.86% and the ROIC was 14.2%.

The business has used some reasonable leverage. As of September 2012, it had $606 million in total stockholders’ equity, $35 million in cash, and $266 million in long-term debt. Because the business has grown partly on acquisition strategy, it booked a huge goodwill and intangible item in its balance sheet worth $735 million. The interest coverage is quite comfortable, at 15.9x; however, because of the huge goodwill and intangible item, its tangible book value is -$6.9 per share.

But Relatively High Valuation

At the current trading price of $128.21 per share, the total market capitalization is $2.4 billion. The market is valuing Middleby at 2.4x P/S and 13.12x EV/EBITDA. At $380 million, Middleby valued the deal at 1.9x P/S. Thus, it seems that Viking Range is relatively a good deal, as the sales valuation is much lower than its own market valuation. Compared to its peers, including the subsidiaries of Illinois Tool Works (NYSE: ITW) and Dover Corporation (NYSE: DOV), Middleby’s market valuation seems to be quite pricey.

ITW is a much larger corporation, with $28.18 billion in total market capitalization. It is valued at only 8.91x EV/EBITDA and 1.6x sales. In addition, it also paid 2.4% dividend yield to shareholders. Dover, which is worth $11.76 billion in the market place, is valued at the cheapest, at 7.96 EV/EBITDA and 1.4x sales. Shareholders also can enjoy the dividend yield of 2%. Thus, I think the market relatively overvalues Middleby at the current price, and the price tag for Viking Range is definitely not cheap.

Foolish Bottom Line

With 20.2x trailing P/E and 2.4x P/S, the valuation is more expensive than the historical average of 16.4x trailing earnings and 1.7x P/S. As mentioned above, I think Middeby, after the continuous run-up for the last several years, has been overvalued. It is also buying Viking Range for a relatively generous price.

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Illinois Tool Works, Inc.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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