Editor's note: A previous version of this article gave an incorrect figure for the amount of debt Middleby would have if the TurboChef acquisition goes through. That mistake has been corrected.
Perennial Motley Fool Hidden Gems pick Middleby (Nasdaq: MIDD) reported third-quarter earnings last week and -- well, what can I say? The news was good.
In the midst of a global recession, Middleby grew its sales 22%, and its earnings per share 16%. And while cynics (right here! [waves hand]) may point out that all of the growth came from acquisitions, that caveat may not be as significant as it seems.
You see, recessions get a bad rap. For many companies, they're very bad news indeed -- witness Circuit City's bankruptcy filing yesterday, Ford's (NYSE: F) multibillion-dollar loss of earlier this week, or GM's (NYSE: GM) warning that its checking account has run perilously low. But for strong companies, those with corporate coffers filled to the brim, and copious cash flow replenishing them daily, a good old-fashioned recession can be just what the doctor ordered.
Oven maker Middleby, as you know, faces significant competition from several strong shops, with Illinois Tool Works (NYSE: ITW), Manitowoc (NYSE: MTW), and United Tech (NYSE: UTX) being among the strongest. But it also competes with a whole array of weaker players, just waiting to get snapped up, consolidated, and streamlined into profit-pumping machines.
Avoid foreclosure! Will buy your business for cash!
Which is precisely what Middleby's been up to lately. Over the past year, it's snapped up five smaller firms, and is now ready to chow down on its sixth course -- rival oven maker TurboChef (Nasdaq: OVEN). Problem is, in the process of taking advantage of weaker rivals, Middleby may have bitten off more than it can chew -- or afford.
Already, a stock that Hidden Gems recommended in large part based on the strength of its balance sheet is now in hock to the tune of nearly a quarter-billion dollars. The TurboChef deal, if it goes through, will push that total close to $360 million.
Foolish takeaway
I hesitate to be the Fool to question CEO Selim Bassoul's business acumen, and his ability to balance all this debt on the tip of his balance sheet in the midst of an economic storm. But I'm a saver-not-a-spender myself, and I must admit that all this debt makes me nervous.
But I'll give Bassoul the benefit of the doubt as long as he shows he can keep the cash rolling in (and he has -- free cash flow is up 37% year to date), and roll it out as quickly to pay down debt (and he is -- long-term debt dropped $17 million over the past three months).
Just how hot is Middleby? Read on and find out:
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