In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!
Sports, like life, isn't always fair. Some matchups are foregone conclusions before the players even take the field. Baltimore Ravens vs. Oakland Raiders? Not a fair fight. Dallas Mavericks vs. Charlotte Bobcats? A gimme. Vitaliy Klitschko vs. any-other-boxer-in-the-ring? Premeditated murder.
And Motley Fool Hidden Gems pick Middleby
In a few minutes, my esteemed but doomed Foolish colleague, Tim Beyers, will try to convince you of the investment possibilities of cartoon heroes. But before he does, let me explain to you why Middleby is the better choice.
The trend's your friend
Basically, it boils down to competition. The more rivals you've got, the more your troubles. The fewer, the better. In Middleby's case, the company dominates its staid market for cooking ovens. Although the firm technically has competitors in the likes of United Technologies
Lacking credible rivals, Middleby grows its business nearly unopposed and expands its profit margins without fear of serious price competition. In evidence, look at what Middleby has accomplished over just the past four quarters:
|
Middleby |
Q1 2006 |
Q2 2006 |
Q3 2006 |
Q4 2006 |
|---|---|---|---|---|
|
Gross margin |
38.4% |
38.7% |
38.6% |
38.9% |
|
Operating margin |
18.1% |
18.3% |
18.5% |
19.3% |
|
Return on capital |
23.2% |
25.2% |
27.3% |
27.6% |
Already far more profitable than you'd ordinarily expect a manufacturer to be, Middleby is just getting better. You see that in the profit margins. You see that in the return on capital. And as we've said before, "companies with higher ROICs are more valuable. ... [Moreover,] it is not only the level of ROIC that matters, but also the trend. A declining ROIC may be an advanced indicator signaling that a company is having a hard time dealing with competition. On the other hand, an increasing ROIC may indicate that a company is outdistancing its competitors or that it is being more efficient at deploying capital. In all, ROIC is a valuable tool to assess the quality of a company."
With profit margins expanding, competition wilting, and returns on capital marching consistently upward, Middleby isn't just a great company -- it's a great company getting better.
Foolish takeaway
It's really as simple as that. Middleby is a great business, getting better. Marvel, a volatile business, has too many question marks. Stick with the proven performer, Fools. Buy Middleby. Follow this link and vote it "outperform."
Click Marvel to read the opposing article in this contest, and here to read the remaining entries in the tourney.
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Fool contributor Rich Smith has no position, short or long, in any company mentioned in this article. He can be reached at [email protected]. The Motley Fool has a superbly sportsmanlike disclosure policy.
