Middleby CEO Selim Bassoul (right) speaks with the Motley Fool's Tom Gardner.
Wall Street is notorious for having a short-term focus, measuring success a single quarter at a time. Yet in some cases, market overreaction to a temporary setback can create opportunities for long-term investors seeking to take advantage of the long-range positive prospects of a company. Earlier this week, Middleby (MIDD +0.67%) gave investors an example of that phenomenon, as the foodservice-equipment manufacturer reported disappointing earnings results on Tuesday night that fell short of what traders were hoping to see. Yet despite the disappointment, Middleby still has a promising future ahead of it, and the company's executives remain laser-focused on maximizing its growth opportunities both now and far into the future. Let's take a closer look at Middleby's results and conference call comments to see whether long-term investors should consider adding the stock to their portfolios.
Middleby's bottom-line growth falls short
Middleby's fourth-quarter results weren't nearly as bad as the stock's 5% drop after the announcement would suggest. Revenue gains actually exceeded expectations, with a 15.3% increase in sales to $435 million reflecting solid performance from Middleby's business units. Yet what threw cold water on Middleby's results was earnings growth of just 3.7% to $51.75 million, which equated to earnings of $0.91 per share, $0.08 below the consensus projections of those following the stock.
A deeper look at the numbers sheds some light on Middleby's overall results. Sales at all three of Middleby's major segments climbed during the quarter, with Residential Kitchen Equipment producing the biggest growth of 29%. Commercial Foodservice Equipment saw sales rise nearly 15% during the quarter, while Food Processing Equipment trailed with just a 6.6% rise in revenue. Middleby got a big portion of its growth from acquisitions during the year, with a positive impact of between 5 and 6 percentage points in Commercial Foodservice and Food Processing and an almost 20 percentage point impact in Residential Kitchen Equipment.
Middleby saw several factors hurt its bottom line. Gross profit margins fell by a full percentage point, as new product introductions and higher warranty costs weighed on the Residential Kitchen Equipment group. Higher tax rates also weighed on profits.
CEO Selim Bassoul. Source: Middleby.
CEO Selim Bassoul remained positive, emphasizing the massive investments that Middleby has made to expand internationally and acquire new technology to drive future product launches. Yet he also noted some of the challenges that the company faced, especially with integrating its acquisition of Viking. On the conference call, Bassoul admitted, "I don't think we expected the quality issues to be pervasive as much as it's been on almost every product line." Middleby has worked hard to win back dealer confidence, though, and those efforts are starting to pay off with more Viking models showing up in showrooms.
Source: Middleby.
What's ahead for Middleby?
Even if near-term profit growth fell short of what investors had hoped for, Middleby still sees plenty of opportunities for accelerating sales and earnings gains in the future. When asked which products he was most excited about, Bassoul went into a long list of everything ahead for Middleby:
- New refrigeration and zero-preheat oven technology will make Middleby unique in the residential space.
- The new fire oven in Commercial Foodservice will be able to cook a pizza in 90 seconds, as Middleby reinvents a business that it's been in for 30 years.
- Fast-casual and fast-food equipment aimed at improving efficiency and increasing safety is making a big difference throughout the industry.
- Combination combi-ovens and blast-chillers will make Middleby one of the only manufacturers to offer both platforms in a single piece of equipment.
- Beverage equipment like its Wunder-Bar continues to show promise.
Source: Middleby.
In particular, boosting its presence in the residential space opens up Middleby to a brand-new economic dynamic. Pointing to figures that showed that sales of premium homes priced at $1 million and up have tripled in just the past two years, Bassoul noted that high-end homebuilders like Toll Brothers have become clients of the Viking brand in order to ensure that the kitchen offerings they include stand up to the rigorous demands of the customers who are buying their new homes.
Clearly, many traders and short-term shareholders will focus only on the immediate implications of Middleby's earnings miss. But with so many opportunities ahead of it, Middleby has every ability to bounce back and redeem itself in the long run.
