Middleby (NASDAQ:MIDD), the top manufacturer of commercial kitchen equipment, saw firsthand just how fickle the market can be. After the company missed earnings expectations by $0.02 per share, investors responded by trading its shares down almost 15% over the ensuing week.
On this video segment, The Motley Fool's Chris Hill and Jason Moser examine this apparent market overreaction, and dive into the possible reasons for the stock price swoon.
A full transcript follows the video.
This video was recorded on Nov. 11, 2015.
Chris Hill: We're going to talk a lot of retail today because there's a lot going on in retail. But we're actually going to start with some earnings from Middleby. Middleby, if you're unfamiliar, basically the restaurant supplier. Pretty much a good chance that if you've been to a restaurant in the United States in the last 12 months, they've got some Middleby equipment back there preparing your food.
Third quarter revenue up 11%. They missed on profit by $0.02 a share, and the stock is down 10%. That seems like an overreaction for not a very big miss.
Jason Moser: Possibly. I mean, I think so. The biggest question we always have with Middleby, quarter in and quarter out, is in regard to organic revenue growth. So that's revenue growth that is on their own without any acquisitions. And with businesses like Middleby, Middleby is an acquisition-based company.
Their strategy is to grow via acquisition, and it's not to say that that's a bad thing by any means. If you look at what Middleby has done to date, Selim Bassoul, the CEO there, has just developed a phenomenal track record and an obvious penchant for going ahead in making good acquisitions.
The problem is, as these acquisitive companies grow -- as they get bigger -- that hurdle gets higher, right? It all is based on that next great acquisition. The market's not really looking at the acquisitions they made; they're thinking more about what are the acquisitions they're going to make. And so what Middleby has historically been very involved as you mentioned in commercial food, right? Commercial food preparation, ovens, soda fountain machines, stuff like that. They're making a move into the consumer side of the business, and they recently acquired Viking, and we've talked about that before.
And they also are making some additional acquisitions to get more into the consumer's kitchen. And so those are, while they're very young acquisitions, they haven't exactly had a chance to really play out yet. I think that, when you look at the shares today, when you look at the way the stock is selling off, that puts shares at around 27 times full-year estimates. And for a company that's not growing their earnings-per-share quite at that rate, it could be argued that Middleby is still possibly even a little bit on the expensive side -- particularly when you consider what they do.
I mean, they're making those big industrial size ovens. So it's somewhat capital intensive. The nice thing, and it's the thing I go back to with these guys, is they have this no-quibble warranty where basically they say, "Okay your restaurant concept, you need new equipment. We're going to sell you this equipment. And if any time within this first year it's not meeting your needs, you don't like it, just return it to us. We'll take it. No questions asked, no charge, we'll take it right back."
Now, there aren't many players out of this space that can really do that. They can't afford to do that. And so I think Selim Bassoul, much like your other customer-centric CEOs like Jeff Bezos, like Reed Hastings, he understands, I think, the value of really developing that sort of trust and relationship with his customers. And so what we've seen to date is just a great stock for shareholders. I think that today's sell-off -- it makes sense. Do I think this is something that is, there's a fundamental problem with Middleby, the business? Absolutely not. But again, it's one where we had to pay attention to those acquisitions going forward because that's how this company's going to be judged.
Hill: You know how, in the Olympics, in sports like diving and gymnastics, there's the degree of difficulty?
Hill: And so you attempt a more difficult dive or gymnastics move, and if you nail it, you're going to get bonus points for that. I feel like Selim Bassoul gets no points from the market for the strategy that he has largely executed. Because we've talked before -- acquisitions are tough to pull off well. And if you're going to pursue a strategy where you say, "This is our basic business strategy. We're going to be an acquisitive company." You're not, fairly or unfairly, you're not going to get any bonus points from the market. But let's be clear: It's not easy to do.
Moser: No, it's not.
Hill: We've seen, time and time again, companies that make an acquisition, and it doesn't go well, or it takes twice as long to integrate the new company as they are initially thought. And it's just, I don't know. That's one of the things I always keep in mind about Middleby, that, nope, they don't get any bonus points for it. But let's be clear: This is a skill set that is rare in company executives.
Moser: It is. I think you're completely right there, and while they don't get bonus points for it, I think you know on the flip side of that, a lot of businesses, a lot of investors out there really do hold these types of businesses up to a bit of a higher standard. They put them under a little bit more scrutiny because of the fact that they are constantly going to be looking for acquisitions, and that's how, that's the strategy of the business, and how they're going to grow.
So a lot of times, investors, investment houses, funds, what have you, they'll look at businesses like this, and they'll hold. They'll be a little bit more skeptical even in the face of someone like Selim Bassoul, who has obviously a very good track record. Just because it is proven time and time again, it's very difficult to do.
I think it speaks very highly to what Selim has built today. You know, he is someone we've had a chance to interview a number times here -- he and Tom Gardner obviously have had a good chance to work together in some capacity. And so we think very highly of him. He's a nice guy, he obviously knows that business inside and out; and, again, I think as long as he's there, I expect to see them continue to do well.
Because, like you said at the very beginning, pretty much anywhere you go to eat, Middleby has a role in that in some capacity. And that's not going to be anything that changes really anytime soon. Ovens, restaurant ovens are very tough to disrupt.