If it's true that brevity is the soul of wit, then Motley Fool Hidden Gems recommendation Middleby
Looking at revenues first, Middleby's growth breaks down as follows: 14.6% organic, 5.3% "inorganic." In other words, the company grew its own business by 14.6%, and bought the remainder of its growth in its recent acquisition of Nu-Vu Foodservice Systems.
Next up: earnings. The 41% rise in earnings is a bit of a red herring. You see, firm-wide profits rose only 13.5%. But that result became supercharged when, in December of last year, Middleby negotiated a buyback of a large stake in the company that had been held by its chairman and other insiders. That buyback yielded two results: first, a 19% decrease in the average number of shares outstanding. Second, an exaggerated jump in per-share profits when the firm-wide profits were divvied up among one-fifth fewer shares this quarter than existed one year ago.
That's pretty much all Middleby had to say this week. But there can be too much of a good thing -- even brevity. It would have been nice if Middleby had indulged in just a wee bit more verbosity and described for its shareholders how well it did from the perspective of free cash flow. From this Fool's point of view, that's really the only question still nagging about Middleby, and it's been nagging since the company's 10-K came out back in March.
Back then, Middleby made the disconcerting admission that its GAAP profits, at $25.6 million, actually overstated its real cash profitability last year (free cash flow came in at just $17.3 million). Ordinarily, I don't place a whole lot of emphasis on fluctuations in free cash flow from one quarter to the next. But a 10-K describes a company's business over the course of an entire year; it must be given greater weight when it shows real cash profits not measuring up to GAAP accounting's promises.
Mind you, given the superb GAAP results just reported, I have every expectation that the free cash flow results will be similarly strong -- once they're published. I'd just rather not have to take that on faith in the meantime.
Since Tom Gardner first recommended Middleby in the November 2003 issue of Hidden Gems, its shares are up 187.98% versus the S&P 500's gain of 13.33%. Want continuing coverage on the company as well as other stock ideas? Take a free trial today.
Fool contributor Rich Smith has no position in Middleby.
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