Updated March 2, 2017. On February 28, for the fourth quarter of 2016, Middleby (MIDD) reported earnings of $1.41 a share, 14 cents a share better than Wall Street had projected. That was an increase in earnings from 88 cents in the fourth quarter of 2015. Revenue climbed 11.6% year over year to $596.8 versus the $578.8 million Wall Street consensus. If you take out the effect of a strong dollar and acquisitions, revenue grew by 6.1% year over year in the quarter. Organic sales in international markets increased by 20%; sales in the company’s U.S. market were basically flat.
The earnings surprise is actually very surprising. Everyone knows that the fast food (or quick service restaurant) segment is struggling as companies such as McDonald’s (MCD) and Wendy’s (WEN) cut prices in what sometime looks like a suicidal effort to build traffic and sales. You’d figure that hard pressed restaurant chains would be cutting spending on new cooking systems–Middleby’s segment–to the bone.
But that’s not the case. Middleby actually offers its restaurant customers one of the only viable paths out of their competitive battle. Because Middleby’s equipment can cut cooking and order fulfillment time so drastically, any chain looking to increase sales by automating ordering or adding delivery (as McDonald’s is doing, for example) needs to buy Middleby’s gear. In fact in its most recent quarterly conference call the company talked about a growing trend toward complete kitchen redesign as restaurants tried to increase efficiency. In international markets where local chains are still expanding and streamlining operations, Middleby’s equipment can help companies to design in efficiencies from the beginning.
The weakness in the quarter for Middleby came in its residential business, There the AGA acquisition was just about perfectly timed to get slammed by the drop in the pound against the dollar. The company continues to make progress on fixing the quality problems it inherited in its Viking acquisition but the improvements are taking longer than the company expected. Organic sales for this unit, excluding the effect of acquisitions and foreign exchange, fell 2.2% in the quarter.
Middleby’s model of acquire and streamline works only as long as the company single-mindedly works to take costs out of its new and existing businesses. From that perspective management’s announcement of a sourcing initiative intended to produce 3% savings from simplifying the company’s supply chain is exactly what a long-term investor in Middleby wants to hear.
Middleby is a member of my long-term 50 Stocks portfolio. The shares are up 193.7% since I added them to this portfolio on May 3, 2013.
