When Restaurant Competition Heats Up, This Company Benefits

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The sandwich chain Potbelly will soon go public. This rapidly growing fast-casual chain has also contributed to another company's growth. The oven-maker Middleby (NASDAQ: MIDD  ) makes ovens for Potbelly, as well as many other restaurant chains. The Potbelly IPO also helps illustrate the threat to casual-dining restaurants like Chili's, the main Brinker  (NYSE: EAT  )  property, and this threat could also help Middleby increase sales. Quick-service restaurants and pizza shops also benefit from Middleby's energy-efficient ovens.

The history
The competition among casual-dining restaurants, fast-casual chains, and quick-service chains has served as a long-term growth driver for Middleby. In 2004, Delroy Alexander reported that Middleby benefited from growth at Potbelly and other fast-casual chains, and also made sales to more established restaurant chains, primarily because of the efficiency advantages its products offered. Lots of companies can make ovens, so Middleby needs a unique selling proposition, and energy efficiency works nicely.

Middleby's CEO Selim Bassoul specifically selected this focus. The company once manufactured a wide variety of household appliances. Bassoul realized that for Middleby to succeed, the company needed to focus on a market that it could dominate.

According to a Smart Business article, Bassoul decided to focus the company on energy efficiency and casual dining back in 2000. With a market cap of $4.03 billion now, this decision has definitely paid off for Middleby. This oven maker has a moat because it helps its customers limit costs in a low-margin business.

Casual dining
Brinker is currently implementing a strategy that could help its restaurants compete with the rapidly growing fast-casual chains. The company has updated its menu and streamlined its restaurants. According to Brinker itself, the Middleby ovens help Chili's prepare additional entrees such as pizza and flatbreads.

In fact, Brinker was so impressed with Middleby's ovens, it awarded the oven maker a "Supplier Partner of the Year" award. Barilla America, Danish Crown USA, and The Wasserstrom Company also received this award in 2013.

This turnaround effort shows promise, but Brinker's most recent results don't look all that impressive. Chili's restaurants actually reported 0.2% lower sales in the fourth quarter of fiscal 2013 than in the fourth quarter of 2012 because fewer customers showed up. Nevertheless, Brinker still reported that Chili's restaurants achieved higher margins during the quarter, partially because of new kitchen equipment. Middleby could help Brinker improve its bottom line even if sales don't improve much.

International growth
Like the restaurants it serves, Middleby benefits from international growth. When companies like Yum! Brands (NYSE: YUM  ) and Domino's Pizza expand into Asian markets, these companies bring along ovens from Middleby. Domino's gave Middleby an award in 2001, demonstrating the importance of this partnership.

In fact, Yum! has also benefited from Middleby's energy efficient ovens. Yum! China was so impressed with Middleby that it also gave the company an award, in this case the "Bridge Builder Award." Middleby's Australian site reported this news, which helps showcase the company's operations in Australia as well.

The partnership could also be meaningful for Yum! Brands. The company has a PEG ratio of 2.07 according to Yahoo! Finance, which is not really appealing, although it does have a 1.8% forward yield. Yum! China offers top-line potential, and with Middleby's help, Yum! might also show some bottom-line improvements in the future.

Middleby offers exposure to the major growth trends in the restaurant industry, such as international expansion and the rise of fast casual. This supplier also works with many major restaurant chains, so even if one restaurant stumbles, the company could still post good results. Middleby also continues to work on ways to cook food even faster, which could make its ovens even more attractive. With a forward P/E of 23, Middleby isn't cheap, but its growth opportunity could make this company worth the risk.

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5/27/2016 4:00 PM
MIDD $124.62 Up +1.43 +1.16%
Middleby CAPS Rating: *****
EAT $45.54 Up +0.70 +1.56%
Brinker Internatio… CAPS Rating: ****
YUM $82.59 Up +0.14 +0.17%
Yum! Brands CAPS Rating: ****