Caution: Contents are HOT!!
These words are plastered on the cover of oven maker Middleby's
Net sales were up 15.1% to $83.9 million. 9.6% of this growth was organic, and 5.5% was attributable to the Nu-Vu acquisition Middleby made back in January for $12 million in cash. Sales were particularly strong internationally, rising by 26.1%, but slowed somewhat in the domestic markets. However, this was expected, as many customers pre-ordered in the first quarter to avoid the price increase Middleby affected earlier in the year. That slowdown is expected to extend into the third quarter, as well.
Gross margin dropped to 38.8% from 39.5% a year ago, mostly on higher steel costs, as some of the more favorable contracts that were in place last year have finally run out. Lower margins in the Nu-Vu product lines also played a part. It's also worth noting that Middleby is getting more efficient in its operations. While G&A expenses outpaced sales by growing at 28.6%, this number did include the costs of the secondary offering in July. Selling and distribution expenses scaled lower, climbing by only 8.5%.
And what about earnings? Per-share net income jumped from $0.82 to $1.11, providing a classic lesson in the positive effects of negative dilution -- the company repurchased a massive amount of shares last December, so don't be fooled by the appearance of 35% bottom line growth. In reality, net income grew by 8.5%, from $8.3 million to $9.0 million.
Moving to the balance sheet, compared with the previous quarter, inventory levels fell by 6%, cash rose by $1 million, and the company paid down $17 million of its debt (reducing the total debt load to $121.3 million). Note, however, that about half of the debt repayment was financed from 2004 tax overpayments. And the statement of cash flows. Well, Middleby doesn't provide one in its earnings releases, but management did state that capital expenditures were $300,000 and depreciation expenses $800,000, so owner's earnings are most likely in line with net income.
Is Middleby worth a $630 million enterprise value price tag after all? If we estimate $31-$32 million in net income for the entire 2005, that's a price tag of 20 times earnings. Which is a little pricey for high-single-digit organic sales growth. It's not unreasonable, though, if you consider that Middleby has done a good job of taking on the brunt of high steel prices, will be introducing a number of new energy-saving oven designs over the next two to three years and should see some margin improvement as its debt level declines.
Bottom line: Even at this price level, I don't think you're going to get burned by Middleby.
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Middleby , which is up more than 250% since it was recommended in Hidden Gems back in November 2003, is typical of the unappreciated and underfollowed companies that Tom Gardner looks for in his investment service. Click here for a 30-day free trial.
Fool contributor Marko Djuranovic does not own shares of any company mentioned in this article.