What happened

Shares of oven maker Middleby Corporation (NASDAQ:MIDD) surged in morning trading Wednesday, topping gains of 20% in response to a big earnings beat.

The shares are rapidly retracing those gains, however. As of 1:10 p.m. EST, Middleby is still up, but only by 5%. So, who's right? The folks who bought Middleby shares by the fistful this morning, or this afternoon's much more cautious stock consumers?  

Flames

Middleby stock was on fire this morning, and it's still pretty hot this afternoon. Image source: Getty Images.

So what

Focus on the headline numbers, and it looks at first like the folks buying this morning got it right. Middleby reported $1.96 in diluted earnings per share, a number under generally accepted accounting principles (GAAP) that was even stronger than the $1.71 per share in pro forma estimates that Wall Street had postulated for the fourth quarter -- and 15% better than last year's Q4 profits.  

Sales for Q4 -- $787.6 million -- likewise trumped analyst estimates of $759.3 million and last year's numbers, growing 4% year over year. For the year, Middleby posted 11% earnings growth (for $6.33 per share in profit) and 9% sales growth (to $3 billion).

Thus, while sales growth slowed a bit in Q4, the profitability of Middleby's sales surged.

Now what

It's harder to say why investors tempered Middleby's stock price gains later in the day. Middleby didn't give any specific guidance on what it expects to sell (or earn) in the first quarter of 2020, or in the whole year for that matter, so guidance probably isn't to blame. If I had to assign blame for the stock giving up its gains, I'd probably point out that free cash flow at Middleby is a little weaker than one might like to see after such a big gain in GAAP profitability.

For all of 2019, Middleby earned $6.33 per share on net earnings of $352.2 million, up from $317.2 million in 2018. Actual free cash flow for 2019, however, was only $330.8 million, which was actually down a bit from the $332.9 million in cash profit generated a year ago.

That being said, things started turning around for Middleby in the fourth quarter. FCF grew 20% in the year's final quarter, ending at $135.9 million. That number was also well above the $109 million in GAAP profit that Middleby claimed in Q4.

In the final analysis, I'd say that if Middleby can maintain that momentum, its earnings report was probably as good as it looked at first glance -- and investors are right to buy it.