The timing was a little strange, but Hidden Gems pick Middleby (NASDAQ:MIDD) brought some good cheer to its shareholders on the evening before Christmas Eve: Next quarter's earnings will be divvied up among 20% fewer shares. That's the good news in a nutshell. Let's take the details point by point.
Middleby is a global leader in the foodservice equipment industry.
First off, the chairman of the board has retired to be replaced by the current CEO, Selim Bassoul. For the next seven years, Bassoul will wear three hats -- those of president, CEO, and chairman of the board. As a general rule, that should be considered a shareholder-unfriendly move. Just as in a democracy, constituents of a company (the shareholders) are best served by checks and balances at the top. One of those checks just got erased.
Next, the effect of the buyback on one of the key criteria we look for in a potential Hidden Gem: insider ownership. The higher the stake management has in its company's well-being, the better aligned management's interests are with those of the shareholders. So here, too, is a negative development. Prior to Thursday's announcement, insiders (including the CEO and members of his family) controlled 34% of Middleby. After the buyback, that number will fall to 14.4%.
And last, the good news: the buyback price. By close of trading Thursday, Middleby's shares stood at $48.19. Over the past 50- and 200-day periods, the shares have traded upwards of $52. But Middleby managed to acquire the insiders' stake for a bargain basement price of $42 -- a discount by any measure. The company also allowed the CEO to cash out his stock options -- 271,000 of them -- but again at a shareholder-friendly price: the difference between the options' strike prices and the $42 price for the shares themselves.
Finally, the likely effect of this mixed news: To finance the purchase, Middleby will take on some debt; the total cost of the buybacks amounts to about $84 million. That should roughly triple the company's current debt load, to about $120 million. Between the degradation of Middleby's balance sheet and the insiders' announced intention to continue selling off the remaining 1.85 million shares of their stock, it's quite possible that Middleby's stock will decline in coming days.
Whichever way the stock goes, though, the net effect of Thursday's news is to leave Middleby's enterprise value unchanged at about $480 million. Free cash flow should also continue pretty steadily at about $25 million. In other words, the company's valuation really hasn't changed much. If Middleby looked expensive to you last week, it's still expensive now. But if it looked right for your portfolio before, then don't let last week's news -- or the market's reaction to it this week -- scare you off.
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Fool contributor Rich Smith has no position in any companies mentioned in this article.
