Middleby (MIDD) Eyes Growth On Buyouts, Headwinds Linger

We issued an updated research report on premium diversified machinery company The Middleby Corporation (NASDAQ:MIDD) on Nov 10.

Existing Scenario

Middleby is currently following an acquisition-based growth strategy. In third-quarter 2017, the company generated $28.6 million sales from its recent business buyouts. In this context, the company’s QualServ buyout (closed in August 2017) and Globe acquisition (closed in October 2017) are worth mentioning. Both are expected to bolster revenues of its Commercial Foodservice Equipment Group in the near term. Also, the Burford (May 2017) and CVP Systems (June 2017) buyouts will likely improve the near-term revenues of the company’s Food Processing Equipment segment.

Moreover, the company believes its latest production expansion moves as well as efforts taken to upgrade the existing plants and develop new manufacturing facilities in emerging markets will drive its top-line performance in the near term.

Middleby also intends to boost its near-term competency in the global foodservice equipment industry, backed by its innovation investments. For instance, products launched under the Viking brand are anticipated to secure sturdy response from the end markets. Moreover, opening of the two residential Viking brand centers in Chicago and New York will be beneficial, as the company will display its recently unveiled products in the same.

However, we notice that over the last three months, shares of this Zacks Rank #3 (Hold) stock have lost 11.3%, as against 10.3% growth recorded by the industry.

Certain integration initiatives have adversely affected the company’s AGA Group business’ revenues in third-quarter 2017. In order to reduce costs and simplify operational process, Middleby is eliminating its less profitable products and lowering price concessions for non-core business in the Residential Kitchen Equipment Group segment. These actions might continue to mar the segments’ performance even in the quarters ahead.

In third-quarter 2017, Middleby’s gross profit margin contracted 190 basis points (bps) year over year. The company stated that the downside was primarily triggered by lower margins recorded from latest acquisitions and unfavorable product mix in the Commercial Foodservice Equipment Group segment. In addition to this, the company’s operating margin dropped 120 bps during the reported quarter, on account of costs associated with ongoing restructuring efforts. These issues might continue to thwart Middleby’s margins going forward.

We also expect that other headwinds such as stiff industry rivalry, input price inflation or an unfavorable foreign currency-translation impact might hurt Middleby’s near-term results.

Stocks to Consider

Some better-ranked stocks in the same space are listed below:

Alamo Group, Inc. (NYSE:ALG) currently sports a Zacks Rank #1 (Strong Buy) and pulled off a positive average earnings surprise of 6.12% over the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Acco Brands Corporation (NYSE:ACCO) holds a Zacks Rank #2 (Buy) and generated a positive average earnings surprise of 81.89% in the last four quarters.

Altra Industrial Motion Corp. (NASDAQ:AIMC) also carries a Zacks Rank of 2 and recorded a positive average earnings surprise of 17.30% during the same time frame.

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