Middleby Business Opportunities Solid, Competition A Drag

We have issued an updated research report on The Middleby Corporation (NASDAQ:MIDD) on Dec 12. Strengthening commercial foodservice, food processing and residential kitchen equipment businesses as well as the company’s innovation investments and synergistic benefits from acquired assets will prove beneficial. However, the growth momentum might get restricted by headwinds rising from international exposure, industry competition and existing near-term risks in the residential kitchen equipment business.

Middleby currently carries a Zacks Rank #3 (Hold).

Below we briefly discuss the company’s potential growth drivers and possible headwinds.

Factors Favoring Middleby

Strengthening Business: Middleby anticipates gaining from its commercial foodservice, food processing and residential kitchen equipment businesses in the quarters ahead. It believes that both the Commercial Foodservice and Food Processing industries have market opportunities in excess of $5 billion while that of Premium Residential industry is in excess of $3 billion.

Also, the company’s international businesses have grown manifold over time, with average sales growing roughly 20% in the past five years. Key markets include Australia, Brazil, China, India, Mexico, Russia, Dubia and the U.K.

Inorganic Initiatives Drive Growth Opportunities: Acquired assets have over time helped Middleby leverage benefits from easy penetration into unexplored markets and expanded product offerings. In this regard, the recently acquired assets of Scanico A/S — Denmark-based manufacturer of industrial equipment meant for freezing and cooling for the food processing industry — is worth mentioning. The company believes that the addition of Scanico A/S will broaden its product offerings and strengthen technological expertise in the Food Processing Equipment Group.

In addition to the Scanico buyout, Middleby acquired QualServ Solutions in August and Globe Food Equipment Company in October. Both these assets are expected to bolster revenues of the company’s Commercial Foodservice Equipment Group in the near term. Also, the Burford (completed in May) and CVP Systems (completed in June) buyouts are projected to improve near-term revenues of the company’s Food Processing Equipment segment. Notably, in the third quarter, Middleby generated $28.6 million sales from its acquired assets.

Investments: Middleby intends to boost its near-term competency in the global foodservice equipment industry on the back its innovation investments. For instance, products rolled out under the Viking brand are expected to secure sturdy response from the end markets. Moreover, opening of the two new residential Viking brand centers in Chicago and New York would be beneficial, as the company will display its recently launched products in the same. Notably, the company has introduced more than 100 award winning new Viking products in the last three years.

Also, the company is making investments to expand its operations in emerging markets and expand facilities.

Factors Working Against Middleby

Poor Share Price Performance & Falling Earnings Estimates: In the last three months, Middleby’s shares have yielded 5.7% return, underperforming 7.5% growth of the industry.

Also, earnings estimates for the stock for both 2017 and 2018 have been revised down by four brokerage firms. Currently, the Zacks Consensus Estimate is pegged at $5.41 for 2017 and $6.08 for 2018, representing 2.3% and 1% decline from their respective tallies 60 days ago.

Adversities Rising From Residential Kitchen Equipment Segment: Middleby’s integration initiatives conducted within the AGA Group business resulted in 5.7% decline in revenues from the Residential Kitchen Equipment segment in third-quarter 2017. In order to reduce cost and simplify operational process, the company is currently eliminating certain less profitable products and lowering price concessions for non-core business within this segment. We believe these actions might continue to mar the segment’s performance in the near term.

Threat From Industry Competition and International Expansion: Middleby faces active competition in each business segment. Extensive business rivalry increases the bargaining power of end users and thus, exposes the company to risks of market share loss. In order to retain competitive power, the company is forced to incur heavy innovation investments, which adds to its aggregate debt level.

In addition, business expansion in foreign nations has exposed the company to risks arising from adverse movements in foreign currencies and geo-political issues.

Stocks to Consider

Some stocks worth considering in the industry are Kadant Inc. (NYSE:KAI) , Sun Hydraulics Corporation (NASDAQ:SNHY) and Altra Industrial Motion Corporation (NASDAQ:AIMC) . While Kadant and Sun Hydraulics sport a Zacks Rank #1 (Strong Buy), Altra Industrial Motion carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kadant pulled off an average positive earnings surprise of 20.32% in the last four quarters. Also, earnings estimates for 2017 and 2018 were revised upward in the last 60 days.

Sun Hydraulics delivered an average positive earnings surprise of 9.58% in the trailing four quarters. Also, bottom-line expectations for 2017 and 2018 improved over the past 60 days.

Altra Industrial Motion’s financial performance was impressive, with an average positive earnings surprise of 17.30% in the last four quarters. Also, earnings estimates for 2017 and 2018 were revised upward over the last 60 days.

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