Big oil producers are raking in record profits from skyrocketing oil. But there are others profiting handsomely from the same phenomenon -- even a company like oven maker Middleby
The company's industry-leading energy-efficient oven systems are a hot commodity among the restaurant industry, particularly for pizza makers like Papa John's
Accounting for Middleby's burgeoning demand, we can add one other reason to the list: its reputation. I asked a local pizza maker here in the Raleigh-Durham area which oven maker has the best reputation in the industry, and without hesitation, he said Middleby. Did I mention I'm kind of a fanatic about everything pizza? Well, Middleby's reputation just got a little bit shinier when, in the company's most recent quarterly earnings conference call, management discussed their newest acquisition: high-end appliance manufacturer Jade.
Jade was the topic of some discussion in the call, since the brand allows Middleby to profit from yet another important trend. Let's see what has management so excited about this acquisition.
The "Porsche" of appliances
In the opening remarks of the call, CFO Tim Fitzgerald indicated that the Jade purchase from Whirlpool's
Jade won't provide an immediate boost to Middleby's bottom line, because the brand "historically has had operating losses in excess of $3 million annually." Based on remarks made by Fitzgerald, we know that the negative impact of the acquisition will be most felt in the second quarter and then should lessen through the remainder of the year. "We expect financial performance to improve in the second half of 2007 as we realize the benefits of integration initiatives," commented Fitzgerald.
Once the company irons out the integration process, expect to see Jade contribute to Middleby's earnings in 2008. How can an historically unprofitable dog suddenly become a green machine for Middleby? During the question-and-answer session of the call, we find our answer.
CEO Selim Bassoul reaffirmed the company's three- to four-year objective of gross margins in the mid-40's range, up from the high 30's level, and operating margins in the mid-20's range, up from the present 18%-19% level. A company can squeeze out extra profits by leveraging what are often more fixed SG&A expenses. I can also generate revenues from more profitable products. I expect Middleby to employ both strategies.
That Middleby's management is sticking to its long-term margin guidance, despite the acquisition of Jade -- a historical dog -- speaks volumes about the hidden value the company sees in the high-end appliance manufacturer. Bassoul had this to say on the quality of Jade's cooking equipment:
"They [Jade] do unique stuff, something that nobody else can do -- nobody. They are one of the leading companies in cooking equipment and ranges. The way Jade built that unit is unique. It is like -- I can tell you it, it [is] most probably built like a Porsche. It is very high performance, [a] very unique product."
Porsche performance sounds nice, but one of Jade's problems, as Bassoul explains, is that it has been selling its Porsches at the "price of a high-end Toyota." So pricing has been an issue. In the future, look for Middleby to better communicate the feature set and quality of Jade products to consumers. Through this improved communication, Middleby hopes to drive a premium price tag for Jade's goods.
In addition to an improved pricing structure, Middleby is also doing away with "non-value added processes" within Jade, cutting jobs to streamline the company to a more efficient model. Middleby also expects to cut additional costs by synergizing purchasing between Jade and itself.
The baby boomer boost
As we've noted, Middleby's top line has been driven by several important trends, including the demand for energy efficiency and speed. My colleague Alyce Lomax highlights another trend that's Middleby's friend: Baby boomer spending at high-end restaurants. Bassoul elaborated in the call, explaining that in cities like Chicago, Las Vegas, L.A., and New York, baby boomers are spending big bucks at upscale restaurants -- the same high-end restaurants, by the way, that Jade caters to.
Alyce sympathized with current shareholders who may be scared off by looking at a five-year chart of Middleby and looking to cash out. But given the opportunities ahead, she counters that it may be too soon to sell Middleby. I agree.
With strong double-digit growth coming out of the international markets for pizza makers, continued pressure from energy prices, and now its ability to capitalize on the current baby boomer binge, I see many more reasons to stick with Middleby as an investment than to sell out. The opportunities still look toasty and tasty.
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