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Middleby Serves Up Appetizing Results to Start 2016

By Dan Caplinger – Mar 3, 2016 at 10:14AM

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Acquisitions helped lift sales, and the food-equipment maker saw substantial outperformance in earnings.

Image source: Middleby.

Restaurants and homeowners alike need kitchen equipment to feed their customers and families, and Middleby (MIDD 0.73%) aims to serve both key groups. The company has made big moves to broaden its scope to address both commercial and residential needs, and coming into its fourth-quarter financial report, Middleby investors were looking forward to the impact that key acquisitions like AGA Rangemaster would have on its quarterly results. Middleby investors focused on a rise in adjusted earnings that pointed to even greater future potential ahead, but some other facets of the company's performance were less positive. Let's take a closer look at how Middleby fared over the past few months and what investors should expect going forward.

Middleby heats up
Middleby's fourth-quarter results reversed the trend that the company had established in the previous quarter. Revenue jumped 23% to $534.7 million, but that was about $10 million less than what most investors were expecting to see from Middleby. GAAP earnings fell 3% to $50.3 million, but after making allowances for the dilutive impact of the AGA acquisition, adjusted earnings of $1.16 per share were $0.15 higher than the consensus forecast among those following the stock.

One key to understanding Middleby's results is that a shift in the calendar had a huge downward impact in the quarter. This year's fourth quarter had 13 weeks, compared to 14 weeks in the year-ago quarter. That created about seven percentage points of structural declines based solely on the length of the period.

That said, Middleby's growth continued to come almost exclusively from the businesses it has picked up through acquisitions. On an organic basis, sales would have been down almost 6% had it not been for the transactions the company made during the past year. Currencies also held back Middleby's sales growth by almost three percentage points.

Middleby's three main segments posted mixed results. Commercial Foodservice Equipment revenue fell 0.5% despite getting an upward boost of about four percentage points from acquisitions. The Food Processing Equipment Group posted similar declines of 0.3% for the quarter, and without acquisitions, organic revenue would have fallen about 4%. The Residential Kitchen Equipment Group again experienced a huge jump, with acquisitions sending revenue up 140% to wipe out what would have been a 12% drop looking only at Middleby's units from the year-ago quarter.

CEO Selim Bassoul took an objective view of the results. He attributed Commercial Foodservice Equipment growth during 2015 to "increas[ing] our business with chain restaurant customers adopting our new and innovative technologies" and pointed to "strong demand for our innovative equipment solutions" in the Food Processing Equipment sphere. Nevertheless, Bassoul also noted the ongoing product recall issues that its Viking unit faces.

What's ahead for Middleby?
Middleby's most exciting opportunity going forward is its AGA Rangemaster acquisition. Bassoul commented that initial efforts to integrate AGA's operations with Middleby's legacy business have been encouraging, and although Middleby took a restructuring charge related to the acquisition, the CEO expects the final result to be more than $20 million in annual cost savings going forward.

Middleby also believes that it can get past the Viking recall issues. The company has already redesigned its product lines and offered completely new products in the refrigeration area, and builders are starting to have confidence in its products again. New product lineups are getting favorable attention at industry trade shows, and internal efforts to cut costs and increase productivity are proceeding apace.

The stock responded favorably to the news, climbing 4% following the announcement. With investors realizing that the company's results were better than the numbers reflected due to the calendar shift, Middleby is doing a good job at turning its recent acquisitions into long-term growth opportunities that should play out well in the long run.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Middleby. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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