What happened
Shares in food equipment company Welbilt (WBT +0.00%) soared 50.3% in the first half of 2019, according to data provided by S&P Global Market Intelligence.
The move marks a recovery in prospects for the food equipment industry after a difficult period from 2015 to 2017. In addition, Welbilt investors took heart from an investor day presentation in which management laid out its targets to 2021 of organic revenue growth of 1% to 2% above end-market growth and operating margin expansion from 18.3% in 2018 to around 23% by the second half of 2021.
Image source: Getty Images.
To put the margin expansion plans in context, Welbilt's adjusted earnings before interest, tax, depreciation, and amortization were only $290.2 million in 2018, so the plan to expand margin by generating annual run-rate cost savings of $75 million by 2021 will have a significant impact on its earnings.
However, it's not just about Welbilt, because as noted above, it's been a year in which the food equipment industry has returned to growth -- one of the standout sectors of the industrial economy in 2019. For example, Illinois Tool Works (ITW +1.36%) CFO Michael Larsen noted on the first-quarter earnings call, "Food equipment organic growth was up 3% on an equal days basis, which followed the best quarter in four years." Meanwhile, Middleby's (MIDD +1.25%) commercial food-service organic revenue rose 3.4% in the first quarter, and the company's stock continues to have a strong year. Welbilt's own organic growth was 3.5% in the first quarter.
Moreover, the return to growth is backed up by industry data such as the National Restaurant Association's Restaurant Performance Index (RPI). The RPI is a monthly index that tracks the health of the U.S. restaurant industry -- a reading above 100 indicates growth. As you can see below, save for a blip in April, the index has been above 101 for a year or so.
Data source: National Restaurant Association.
So what
Whenever an industry starts to demonstrate that it's not actually headed for some sort of protracted slowdown, investors usually take note and realize that the stocks might be undervalued relative to their prospects. Moreover, given that Welbilt is one of the more speculative stocks in the sector, it's likely it's going to wholeheartedly participate in a relief rally.
Now what
Looking ahead, the food equipment sector needs to show that it's over the weak patch of a couple of years ago. Indeed, the fact that, since 2015, Americans now spend more money in restaurants and bars than they do in grocery stores suggests the end-market environment is favorable. For Welbilt, the key for the next couple of years is to take advantage of these positive trends and execute on its cost-reduction plans.
