What happened
Shares of The Middleby Corporation (MIDD -2.77%) slid 11.7% in February, according to data from S&P Global Market Intelligence. Although the stock had declined in line with the market for most of February, the underperformance was driven by a disappointing set of fourth-quarter earnings.
Middleby is a highly acquisitive company so it's always a good idea to look at sales growth excluding acquisitions and foreign exchange movements. The following table shows how difficult 2017 was for the company. Indeed, CEO Selim Bassoul noted that within Middleby's core commercial foodservice equipment market "growth definitely in 2017 was not as much as expected" during the earnings call.
|
Segment |
Q1 2017 |
Q2 2017 |
Q3 2017 |
Q4 2017 |
|---|---|---|---|---|
|
Commercial food service |
(2.6%) |
(3.3%) |
0.5% |
(2%) |
|
Food processing equipment |
(0.9%) |
8.5% |
(5.2%) |
(14.4%) |
|
Residential kitchen equipment |
(5.9%) |
(9.1%) |
(6%) |
(8.2%) |
|
Total |
(3.4%) |
(3.4%) |
(2.1%) |
(5.7%) |
Data source: The Middleby Corporation. Sales growth excluding acquisitions and foreign exchange.
So what
Middleby's earnings report would have dismayed anyone hoping for a quick return to growth in the U.S. food equipment sector, and it pretty much mirrors what other companies are saying about the marketplace. For example, at the end of January, Illinois Tool Works (ITW -1.64%) CEO Scott Santi's commentary suggested that the first half of calendar 2018 would remain weak with "some optimism as it relates to the second half."
Middleby's customers have been delaying capital equipment purchases. Image source: Getty Images.
It was a theme reiterated by Welbilt (WBT) CEO Hubertus Muehlhaeuser when he spoke about prospects for the restaurant industry in the U.S "Industry sources are currently forecasting continued soft conditions during the first half of 2018 with some improvements in the second half."
Bassoul had previously given a litany of reasons why sales dropped in 2017, some of which suggested that it was a question of the timing and type of capital spending from customers -- rather than any kind of structural issue -- that lay at the heart of the problem.
Now what
Reading between the lines, it looks like investors shouldn't expect too much of an improvement until at least the second quarter. Illinois Tool Works and Welbilt both signaled as such with regard to end markets and Bassoul's commentary suggested the same.
During the earnings call, he talked of commercial foodservice equipment orders in "positive territory right now" and suggested his prediction for Middleby's growth was "a lot more" than the 1%-2% that industry sources are forecasting for the industry in 2018. Meanwhile, the reorganization of Middleby's sales structure -- which also impacted sales -- should be complete by the end of the first quarter.
Food processing sales reflect weak orders in the second half of 2017, and are expected to impact the first quarter as well. Middleby CFO Tim Fitzgerald claimed the segment had a "strong pipeline of projects entering in 2018" and orders had improved "early
in the year with several larger projects being finalized." Meanwhile, order trends in the residential kitchen equipment group have "seen improvement," according to Bassoul.
All told, the next quarter should see tangible signs of improvement for Middleby and the industry, and the numbers should start to get better in the second half.
