Middleby: Still Delicious

Here's an email I get a lot:

COMPANY X is down Y more since I bought it. Should I sell?

The answer, of course, is maybe. But the better question may be: Should I buy more? That's what I hope investors in oven maker Middleby (Nasdaq: MIDD  ) are asking themselves after yesterday's 9% sell-off.

What caused the panic? That's anyone's guess. But here's a theory: Middleby only met analyst estimates for earnings growth in Q4, which is a big change from the prior three quarters, when its bottom line number beat the street by 9.7%, 14.4%, and 20.2%, respectively.

Maybe that means earnings growth is slowing. Maybe, but I wouldn't be quick to judge. After all, the company posted strong results. Sales were up 18.1% for the quarter and 16.8% for the year. And earnings improved from a $660,000 loss in Q4 2004 to a $7.2 million gain during the same period in 2005. It seems cash flow improved, too. I say "seems" because Middleby didn't publish a cash flow statement (boo!). But the balance sheet shows that cash on hand increased while total debt fell slightly.

If there's any cause for concern, it's in the receivables inherited from Middleby's December acquisition of Alkar Holdings. Receivables grew more than twice as fast as sales during Q4. There's good reason to believe the numbers will normalize over time, however. And to be sure, management intends to streamline the Alkar product line, eliminating some commodity-oriented products. Over time, executives say that a 40% gross margin -- including a fully integrated Alkar -- is their target.

Finally, management says that a number of trends favor its business, including a more diverse menu among the restaurants it serves and a demand for more energy-efficient ovens. I've no reason to doubt that conclusion. But actions always speak louder than words in my investing experience, which is why I'm most encouraged by the SEC filings of group president Phil Dolori. In the past two weeks, he's exercised options for 3,000 total shares. The first transaction came on Feb. 27. The second a week later, on March 6. Here's the rub: Even though his combined return on those shares would result in more than an 11-bagger, at $85 per stub, he has yet to sell.

I find that kind of confidence positively mouth-watering. Maybe you should, too.

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In writing this piece, Fool contributorTim Beyersgot hungry for a fresh-baked pizza out of a Middleby oven. Yummy. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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