Innovation Drives Growth at Middleby
02/27/2014 11:30 am EST
Even though this cooking and industrial process equipment company's stock is already up considerably, MoneyShow's Jim Jubak thinks it can go even higher over the long-term.
If more companies were reporting sales and earnings growth like Middleby (MIDD) reported on February 25, the Standard & Poor's 500 (SPX) wouldn't be having such trouble moving above its all-time highs.
For the fourth quarter, Middleby reported earnings of $2.62 a share, 37 cents a share above the Wall Street consensus and a 29.1% increase from earnings in the fourth quarter of 2012. Revenue climbed 29.4% year over year to $377.4 million versus the $364.9 million consensus among analysts.
As of 2:00 PM New York time on February 25, Middleby shares were up $36.07 to $299.78 for a 13.7% gain. (Middleby is a member of my long-term Jubak Picks 50 portfolio.)
Now, I know that this pick is up 107% since I added it to this portfolio on May 3, 2013, but I don't see any reason to sell here. The reason that Middleby is a long-term pick is that the company has a very simple growth strategy that it can repeat over and over again until the world stops opening and remodeling restaurants. And I don't see that happening any time soon. Middleby noted, in a 2012 investment conference presentation, that it has products in one-third of all restaurants. That's impressive—but it also means that Middleby doesn't have products in two-thirds of the market.
Simple, in Middleby's case, doesn't mean easy to execute. The company operates in a fragmented market for restaurant equipment—which means it has the opportunity to buy up promising small equipment makers. It then uses its relatively larger size to drive down costs at those companies, while opening up new markets for their equipment. If you sell pizza ovens to Papa John's, for example, you can sure sell soda vending machines too, right?
But Middleby doesn't stop there. The goal isn't simply to cut costs but to drive innovation. In 2012, 20% of sales came from new products—the goal is 40% by 2016. New products have 5% to 10% higher gross margins, so you can see why Middleby wants to add new products to its revenue stream.
Why do Middleby's customers want to buy these new products? Because they cut costs by being more energy efficient, by reducing cooking times, by producing a more uniform product (thus reducing waste), and by cutting labor costs by reducing cooking staff. Middleby figures that the average time to payback on its new equipment for a customer is less than two years.
Middleby's has got two big sources of growth on its horizon, in my opinion (besides that two-thirds of the market that doesn't, yet, use its equipment).
First, thanks to a slowish US economy, there hasn't been a big wave of restaurant kitchen remodelings since 1998-2000. 56% of casual dining restaurant kitchens, for example, haven't been remodeled since 2000, Middleby calculates.
Second, Middleby has lots of room to grow with emerging markets. In 2011, 28% of company revenues came from these economies where Middleby is already Number One, in China, India, and Latin America for chain restaurants. Middleby's new product strategy in these markets isn't to simply try to force existing US-oriented products on these markets. The company has engineered tandoor ovens and samosa fryers, rice steamers, pita ovens and gyro broilers, to name a few products for restaurant kitchens in these markets, and then, to stay in touch with these customers, it is manufacturing locally.
I think you can continue to hold onto this one.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Middleby as of the end of December. For a full list of the stocks in the fund see the fund's portfolio here.