Wolf Hill Capital Management, LP is the management company of the Wolf Hill Partners fund. Insider Monkey has recently published a copy of Wolf Hill Capital’s Q1 2020 investor letter. A copy of the letter can be downloaded here. Gary Lehrman is the fund’s founder and managing member. For Q1 2020, the fund reported a net return of -10.13%, while the S&P 500 returned -20.94%.
In the said letter, Gary Lehrman highlighted a few stocks and Middleby Corp (NASDAQ:MIDD) is one of them. Middleby is a global leader in the foodservice equipment industry. Year-to-date, MIDD stock lost 51.1% and on April 22nd it had a closing price of $51.31. Its market cap is of $3.01 billion, and MIDD is trading at a price-to-earnings ratio of 8.47x. Here is what Gary Lehrman said:
“The Middleby Corporation designs, manufactures, markets, and services a broad line of equipment for use in cooking and preparing food. The company’s products are used in commercial and institutional kitchens and restaurants as well as the residential market through such well-known brands as Viking and Lynx. In recent years, Middleby has embarked on an aggressive, debt-fueled roll-up of dozens of different brands. Since 2001, Middleby has made more than 90 acquisitions, the results of which served to obscure negative revenue growth and growing free cash flow deficits. Since organic revenue growth had stalled even prior to the outbreak of COVID-19, the devastation caused by widespread restaurant failures in the wake of shelter-in-place regulations combined with an over-levered balance sheet will cripple Middleby’s earnings and de-leveraging prospects over the foreseeable future. Further, our industry channel checks with large restaurant franchisee groups confirm that there is a flood of lightly-used kitchen equipment that is about to enter the secondary market due to cascading restaurant failures. As the availability of lightly-used equipment proliferates, demand for new equipment and equipment pricing will get eviscerated. The National Restaurant Association estimates that ~15% of domestic restaurants will shut permanently. In the current climate, many large restaurant chains and independents alike are eliminating/deferring capital expenditures in an effort to preserve cash to live to fight another day. Even under the optimistic scenario where social distancing restrictions begin to lift in the next few months, restaurants will need to prepare for a world where effective seating capacity gets cut in half as tables will need to be spaced 6 feet apart from one another. This is an overlooked dynamic that was repeatedly reinforced to us during our diligence on the restaurant sector. In fact, anecdotal evidence3 of China’s post-quarantine restaurant traffic confirms that traffic has not come close to rebounding to pre-quarantine levels despite other areas of the economy having rebounded far quicker. In 2019, 21% of Middleby’s revenue was derived from its Residential Segment which sells premium brands such as Viking, Lynx, and AGA among others. This segment is levered to two highly economically sensitive corners of the economy: single family housing starts and kitchen repair and remodeling. Oops. As Middleby’s earnings come unhinged over the coming 12 months, we envision downside valuation support around 30-50% lower than today’s $2.8b valuation.”
In Q4 2019, the number of bullish hedge fund positions on MIDD stock increased by about 40% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
