Expect the Fireworks to Continue

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Middleby (NASDAQ: MIDD) is a manufacturer of ovens and cooking equipment riding the wave of the trend towards fast foods that is starting to get traction in the developing world.

Middleby is based in Elgin, Illinois with subsidiaries geographically spread throughout the world and has grown into a market leader through an aggressive policy of acquiring competitors and using borrowings to finance the buying spree.

Growth through acquisition is usually a challenge for any management team. The temptation to overpay and the ability to integrate acquisitions quickly being two of the major challenges.  Middleby seem to be very good at this having made the following acquisitions in the last two financial years:

Beech Ovens - April 2010

PerfectFry – May 2010

Cozzini Food Processing Equipment  - September 2010

Lincat Group - May 2011

Danfotech Inc. – July 2011

Maurer - Atmos  - Jul 2011

Auto-Bake – August 2011

F.R.Drake – December 2011

Armor Inox - December 2011

Source:  http://www.middleby.com/MidCorp/Press_releases

These acquisitions have resulted in Middleby achieving the necessary critical mass to compete internationally and become an industry leader. It has however lead to the value of goodwill rising to $478 million as of 31 December 2011.  This goodwill has arisen through paying in excess of book value for the assets acquired.

Middleby is led by Mr. Selim Bassoul, who is well known for his marketing and engineering skills to which he can now add the title of serial acquirer. Mr. Selim Bassoul is the well paid ($9.08 million in 2011) Chairman of the Board and Chief Executive Officer. Middleby’s results are however impressive with the company’s share price up 50.49% over the last 52 weeks compared with an advance of 14.27% by the S&P 500 over the same period making his pay seemingly well earned.

Once considered a sleepy industry, breakthroughs in labor and energy saving, together with speed of cooking demanded by the fast food industry, have meant that companies that cannot adapt and grow will quickly fall by the wayside. Middleby was onto this trend in 2009 when it was awarded Yum! Brands (NYSE: YUM) Supplier of the Year and the latest acquisition of new technologies are keeping them out front. YUM!’s expansion into China is well documented making them the leading international brand in China.

The aggressive acquisition policy has resulted in excellent growth in revenue and earnings; however, the use of debt to finance the buying spree has meant that dividends will not be paid for some time. Consequently any increase in interest rates would negatively impact the company’s bottom line. The debt to equity ratio of 0.45 is still relatively low and interest coverage amounted to 12.2 times in 2011. The senior revolving credit facility was renewed in 2012 allowing Middleby to continue to fund its global expansion.

What About the Longer Term Performance?

It is always good to zoom back and look at the five year performance to see whether or not the company’s expansion through acquisition is working.  Management has to be commended for the rapid growth. Over the last five years revenues have grown from $500 million in 2007 to $856 million in 2011 (71%). Net earnings have grown by 81% in the same period.

Although the historic price to earnings, PE, ratio of 20.47 is at a premium to the market, the forward PE of 17.59 and the PEG ratio of 1.01 support the current valuation.

If Management can continue to find suitable acquisitions to fuel growth (Turkington U.S.A. was added in March 2012 and Stewart Systems Global LLC in September 2012 ), then the current share price around $120 would seem to be in bargain territory.



mningi has a position in Middleby. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Yum! Brands. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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