A Lesson from Middleby
03/03/2014 12:01 am EST
MoneyShow's Jim Jubak takes an in-depth look at one of his favorite stock picks and how he evaluates their business going forward.
There is a lesson in Middleby (MIDD). The company came out on February 25 and announced a tiny little beat. They beat by 37 cents a share over analyst's expectations. That drove the stock up about 13% and you are now looking at shares that are trading around $300. Now the lesson here is, “Well, what do you do when you have had a stock that has moved up as much as this, that is trading at this price, and how do you decide whether you are going to sell or not?” Typically, you look at price trends. You look at fundamentals and all those things are favorable for Middleby and one of the things that people tried not to do here is to sell just simply because they are nervous at their own success. The stock is up about 107% since I added it to the Long-Term Jubak Picks 50 Portfolio in May, since 107% less than a year. At $300, it is starting to feel expensive to many people. I think the inclination that people have is to sell.
There is another thing that I think you ought to look at besides technical patterns, momentum, and all that, which is okay. This company as a business is being very successful, how likely is it that it can continue to replicate that success? In other words, what is the formula here? Is the formula doable over, over, and over again and under what conditions? The great thing that is Middleby is that it is in the business of selling restaurant equipment. It says, “Hey, you know, there has never been a year in which people have gone out where restaurant revenue has gone down.” There are years when the growth is slowed, but people go out and eat, pretty much no matter what. They eat at some kind of restaurants. Middleby is in the chain restaurant business and the fast food restaurant business and that is where they sell, sort of, a core market here. What is interesting is that they have a formula, which they apply over, over, and over again; basically, it has always been a very fragmented industry. Middleby goes out and buys smaller companies, puts in cost controls, but it is not just cost controls. What they are really interested in, is in innovation. The last time I looked, which was 2012, about 20% of revenue was coming from new products. The company says that is not enough, they want to drive it to 40%. What they try to do when they develop these new products is, they try to develop products that save customers money, are more energy efficient, less labor intensive, and better quality, so that they figure the payback on a piece of Middleby equipment is less than two years. That is sort of the formula that they use.
Is there an end point to that? Well, at some point, the universe is full of restaurants and no one is opening up another one, but short of that, Middleby says, “Hey most chain restaurants have not been remodeled in their kitchens since the big growth spurt of 1998 to 2000”, so they say, “Oh, like 56% of casual dining restaurants have not been remodeled since 2000.” The other things they say are, “We are seeing a lot of growth in chain restaurants in the developing world. Only less than 30% of our revenue came from there, so that is a huge market for us.” The thing I really like about that is they are not saying, “Oh okay, so we are going to sell pizza ovens to restaurants in Japan.” What they are instead saying is, “Oh, okay, so we will do tandoori ovens. We will do gyro makers. We will do pita ovens.” They tend to come up with products for local markets, produce them locally, and that, I think, gives them a really good attitude toward international growth going forward.
Three hundred dollars seems high, 107% in less than a year seems high, but again, if they can keep replicating this, there is really no reason why that is too high.
This is Jim Jubak for the Money Show.com Video Network.