Over the two years since we first recommended the stock, Motley Fool Hidden Gems'Middleby (NASDAQ:MIDD) has turned out to be our most successful pick ever -- an honest to goodness triple-bagger for our subscribers' portfolios. But with the stock up over 200% since we picked it, investors have to be wondering: How long can Middleby keep this up? On Monday, we'll find out.
Middleby is scheduled to release its Q3 2005 earnings on Monday afternoon, after the close of the day's trading. As for what those earnings will be, the company didn't give much in the way of quarterly guidance in its last earnings report back in July. Analysts, however, think they have the company pegged at about $79 million in quarterly revenues and $0.98 in profits per diluted share. For comparison, that would equal about a 12% increase in sales, but a 5% decrease in profits.
While an earnings decline is rarely good news, if you add the expected $0.98 to the $1.91 that the company has already earned in the first half of this year, Middleby would be better than three quarters of the way toward reaching the $3.74-per-share goal that Wall Street has set for the year. Earnings could even decline sequentially next quarter, and if the company at least hit the estimate currently in place for its fourth quarter, it would still make its numbers for the year.
That's the good news. The bad news is that, in two of the past three years' fourth quarters, Middleby has actually booked losses, so hitting the year's target could be problematic.
But enough about the earnings game. As investors in great businesses, what we really want to be looking for at Middleby next week are three things:
- We want to see the company demonstrate better control over collections. Assuming 12% year-over-year revenue growth, last quarter's 10% year-over-year increase in accounts receivable would be acceptable; the first quarter's 26% rise, not so much.
- Likewise, we want to see inventory levels drop significantly in comparison to last quarter. The past couple of quarters have seen Middleby grow inventories in the mid-20% range, materially faster than revenues have grown. That has to stop (unless we're talking about positive inventory divergence, of course).
- Finally, while we love the fact that Middleby has bought back roughly 20% of its share count over the past year, we're less thrilled about all the debt the company took on to accomplish this noble feat. The company made progress in paying part of its debt down last quarter, and we'll want to see more of the same in Q3.
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Fool contributor Rich Smith does not own shares of Middleby.
