Why The Middleby Corporation Has a Huge Appetite for Acquisitions

A company with soaring growth is delivering searing returns for investors.

Apr 8, 2014 at 6:00PM

If some of the best investors are often the most contrarian, perhaps the same goes for the best investments as well. That's certainly the case for our co-founder Tom Gardner's single greatest stock pick, the food industry equipment company Middleby (NASDAQ:MIDD). The manufacturer, based in Elgin, Ill., has become a 27-bagger since the early 2000s, but Middleby's cooked up growth in a quite unconventional manner.

A food service feeding frenzy
Despite numerous studies revealing the abysmal results of merger and acquisition activity (around 50% of transactions fail), Middleby nevertheless continues to stock its pantry full of kitchen appliance businesses. Its latest target: Processing Equipment Solutions, which was purchased less than a week ago by Middleby for an undisclosed sum.

With this recent addition to the portfolio, Middleby brings its 2014 acquisition tally to three through the first week of April. At this rate, the company is on pace to conduct roughly a dozen buyouts for the year, which would quadruple its M&A activity in 2013 and triple that of 2012.

But investors shouldn't expect Middleby to stick to some cookie-cutter formula for gobbling up the competition. Its strategy, in fact, is the polar opposite of that mentality, according to Selim Bassoul, Middleby's CEO for the last 13 years. As Bassoul told The Motley Fool less than a year ago, the kitchen equipment maker's extraordinary track record in the field of mergers is due to a focus on three things that matter to the Middleby organization:

  1. Does a target company provide a trusted brand and a patented technology that's disrupting the commercial kitchen market?
  2. Can Middleby add value by providing an opportunity to scale quickly or by infusing the company with some of its own DNA?
  3. Will the acquisition be accretive to Middleby's earnings per share in less than 18 months? (Accretive means EPS is enhanced beyond what was originally paid. For a great explanation of this concept, read further here.)

By ensuring the answer to these three questions is a resounding "yes," Middleby separates itself from the rest of the companies who go hunting for buyout targets with a single-minded focus on growth and nothing else. It's a contrarian approach, but for Middleby it works.

In this manner, Bassoul's company stays focused on its core market of commercial kitchen equipment – only rarely does it stretch into the consumer space with targets like Viking Range – and it ensures that radical change will not be required upon completion of the deal. In fact, Bassoul notes that Middleby never aims to replace a target's management team, which allows its own executives to keep their eyes on the main entree even when there are a lot of new appetizing plates being added to the mix. Further, Middleby has yet to appear overstretched despite snatching up 33 different kitchen equipment makers since 2005.

Where other companies have faltered, Middleby has flourished. Its savvy acquisition strategy has helped quadruple annual sales during the last nine years. Still, this cookware conglomerate shows no signs of slowing: For its latest quarter, Middleby posted a 40% increase in revenue to close out 2014.

Why it's not too late
Given its voracious appetite, it seems as though Middleby never saw a kitchen company it didn't like. In reality, though, management is incredibly picky about how it grows the portfolio. Through smart buyout opportunities and steady expansion, Middleby's posted a 10-year earnings-per-share growth rate that hovers above 30%. With shares currently trading at a price-to-earnings ratio of 30, investors should fill up their plates – or, um, portfolios – while they still have the chance.

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Isaac Pino, CPA owns shares of Middleby. The Motley Fool recommends Middleby. The Motley Fool owns shares of Middleby. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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