Smokin' Middleby

Wall Street may look like a sea of red today, but there's one hot stock bucking the trend. The last time I checked, Middleby (Nasdaq: MIDD) had increased about 12% after reporting its third-quarter results.

The oven maker's net income increased 15% to $14.1 million, or $0.83 per share. Net sales increased 31.7% to $136 million. Middleby's income from operations increased 20.9%, thanks to gains in its commercial food service and food-processing equipment sectors. Unfortunately, a work stoppage in Illinois partly offset the gains.

The company said that its recent acquisitions of Huono, Jade Range, Carter-Hoffman, MP Equipment, and Wells Bloomfield boosted net sales. These acquisitions represented 25.8% of Middleby's sales growth, apparently validating Middleby's acquisitive strategy of snapping up smaller companies and enhancing their profitability.

If you flash back to this time last year, you'll see that Middleby had a piping-hot quarter then, too. Unfortunately, unlike last year, when Middleby decreased its debt using operating cash flow, its long-term debt increased 28% this year, because it used operating cash flow to finance recent acquisitions instead.  

That said, Middleby has a great reputation as being a well-run company in a large and growing space. It provides ovens and related heating equipment to restaurants like Papa John's (Nasdaq: PZZA), and to a lesser degree, to residential customers. Although it faces competition from the likes of TurboChef (Nasdaq: OVEN), which recently reported a turbo-charged quarter itself, so far Middleby seems unfazed by its rivals.

Middleby has been one of Motley Fool Hidden Gems' best-performing stocks, having earned three separate recommendations from the service. It's up more than 600% since Tom Gardner first recommended it to subscribers in November 2003. Middleby is arguably a great example of the profit power that relatively unknown and underfollowed small-cap stocks can provide for investors' portfolios.

You could argue that 25 times trailing earnings sounds pricey for a boring old oven manufacturer. Even if they're constantly chowing down on fast food heated up by the Middleby's equipment, most investors have never heard of the company. However, given its solid history of performance and double-digit growth rates, it seems small-f foolish to underestimate Middleby's strengths in the long term.

Reheat some related Foolishness:

• Check out TurboChef's quarterly results.
• Last quarter, Middleby delivered a boring bonanza.
• Revisit last year's third-quarter results, which were piping hot.