We came across a bearish thesis on Middleby Corporation (MIDD) on ValueInvestorsClub by dsteiner84. VIC is our preferred site because the ideas there are generally posted by aspiring analysts who produce in-depth research. We find the ideas presented on the site well thought out and worth a serious look. Click here for the full article. Below we summarized the MIDD bearish thesis. Middleby Corporation shares were trading at $135.72 when this thesis was published.
The Elgin, Illinois-headquartered and 1888 founded Middleby Corporation, also known as Middleby Corp. (MIDD), is an American company that manufactures commercial and residential cooking appliance and industrial process equipment. MIDD is the leader in commercial kitchen worldwide, offering the most advanced innovations for cooking and warming, refrigeration, freezing, and beverage solutions for top restaurant and institutional customers. It employs about 10,000 people and has presence in five continents. MIDD’s three segments are 1) Commercial Foodservice (67% of revenue), 2) Residential (19% of revenue), and 3) Food Processing (14% of revenue). Geographical pie of the revenue stands at 61% from North America, 33% in Europe & the Middle East, and balance from LATAM and Asia.
The analyst, in the original blog on 31st, January, 2021, recommended shorting MIDD. Primary rationales were cited as follows:
- MIDD operates in a highly competitive and fragmented markets. The 2nd tier brands are offering more technology and features, giving stiff competition to premium brands like MIDD.
- The Commercial Foodservice segment is expected to head into contraction in the COVID19 induced challenging operating environment. The obvious victims are independent restaurants, casual dining, travel & leisure and related franchises.
- Against the backdrop of an already flat organic growth over the past five years, MIDD has been struggling to keep its head above the water. The company is seeing its revenue, operating income, and margins heading south while its debt remains high.
- While MIDD always boasts of innovative technology in its wares, there is little distinction in its products, which makes the premium charged by MIDD for its products a tag too steep. And, the probable cause for this lack of technology shine is the limited R&D expenses MIDD incurs. A mere 1.4% of sales spent in 2019 pales in comparison with its peers.
- Slew of acquisitions has resulted in deceleration of ROIC in the recent years, and is likely to shrink further in 2020. This is due to the executive compensation being tied to acquisitions, and not the organic growth. Clearly, the acquisitions have failed to be accretive.
- MIDD has also failed to efficiently manage their inventories. Last few years have seen old stocks pile up, making them obsolete in some cases.
Summary
Despite macro and micro challenges, MIDD has been hovering around its all-time highs. Street consensus seems to overly optimistic about its 2021 and 2022 EPS growth estimates. MIDD should be trading in line with its five-year average of mid-teen P/E multiples, giving it a target of $106 (-20%).
See also 10 Biggest Fast Food Chains In the World.
