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Cooking Up Value with Viking and TurboChef

07/09/2018 5:00 am EST

Focus: INDUSTRIALS

Douglas Gerlach

President, ICLUBcentral, Inc.

While The Middleby Corporation (MIDD) may not be a household name, many of the company’s kitchen equipment products are well-known to consumers around the world, explains Doug Gerlach, editor of SmallCap Informer.

Its commercial foodservice equipment division is the largest global manufacturer of commercial cookware. Products are used in restaurants, from quick service to fine dining, and in institutional foodservice such as hospitals and schools.

Consumers are more likely to be familiar with the company’s residential kitchen equipment divisions, makers of Viking and TurboChef ranges and U-Line refrigeration units.

In the last decade, revenues have grown on average 17.9% a year, with EPS coming in at 20.3% a year. Growth has been slowing as the company gets larger; 2017 revenues were $2.335 billion.

In the first quarter of 2018, Middleby reported 10.3% sales growth but saw EPS slide 4.8%, hurt by restructuring expenses. Those costs should abate this year.

Middleby has been on a buying spree in the last half decade. From 2015 to 2017, acquisitions added approximately $600 million in annual revenue.

In the first half of 2018, the company closed its purchase of Taylor for $1.0 billion from United Technologies (UTX). Taylor is a world leader in beverage solutions and ice cream dispensers.

The company sees many drivers of future growth, including the opportunity to expand still further internationally and the growth of non-traditional foodservice markets (such as in convenience stores).

Innovative equipment solutions will allow for deployment in smaller or vent-less locations, provide more speed and automation using less energy, and maintain food safety practices.

The residential kitchen equipment division is an early stage platform with significant growth opportunities. Viking will introduce 59 new products in 2018, and return to organic growth in the second half of 2018 of greater than 10%, with continued margin expansion helping to improve earnings.

We expect revenues to grow as much as 12% annually through 2022, and EPS to grow 14% annually, stoked by margin improvement.

Pre-tax profit margins have been steadily increasing, reaching an all-time high of 19.2% in fiscal 2017. The company expect to see still further margin expansion, and is now completing a salesforce consolidation that is expected to both improve sales and reduce costs. Return on equity is exemplary at 22.5% in fiscal 2017.

With Middleby’s EPS reaching $9.99 in five years, a high P/E of 23 would indicate a high price of $229. On the downside, a low P/E of 14 (not seen since 2011) suggests a potential low price of $73. From the current price of $105, the upside/downside ratio is 3.8:1, and a potential annual return of 16.8% is possible.

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