Why Is Middleby (MIDD) Down 46.3% Since Last Earnings Report?

A month has gone by since the last earnings report for Middleby (MIDD). Shares have lost about 46.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Middleby due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Middleby Surpasses Q4 Earnings and Sales Estimates

Middleby reported better-than-expected results for fourth-quarter 2019, with earnings surpassing estimates by 16.3%. This is the company’s second consecutive quarter of impressive results. Also, sales in the fourth quarter surpassed estimates by 3.2%.

The company’s adjusted earnings in the reported quarter were $2.00 per share, surpassing the Zacks Consensus Estimate of $1.72. Also, the bottom line rose 7% from the year-ago quarter figure of $1.87 on benefits from acquired assets and improved operating results.

For 2019, the company’s adjusted earnings were $7.02 per share, increasing 10.6% from the previous year. Also, the bottom line surpassed the Zacks Consensus Estimate of $6.81.

Revenue Picture

In the quarter under review, Middleby’s sales were $787.6 million, reflecting year-over-year growth of 4.1%. Organic revenues in the quarter declined 0.4% year over year. Acquired assets grew sales by 5.1%, while unfavorable movements in foreign currencies had a negative impact of 0.5%. Closure of the non-core business had a negative 0.1% impact.

Also, its net sales surpassed the Zacks Consensus Estimate of $763.5 million.

The company reports net sales under three segments. A brief discussion of those segments is provided below:

Sales from the Commercial Foodservice Equipment Group (representing 65.1% of the reported quarter’s net sales) were $512.5 million, increasing 5.9% year over year. Sales, excluding the impact of forex woes and buyouts, grew 0.4% in the quarter.

Sales from the Residential Kitchen Equipment Group (representing 19.5% of the reported quarter’s net sales) totaled $153.6 million, inching up 0.2% year over year. Sales (excluding the impact of forex woes, end of non-core businesses and buyouts) in the quarter declined 0.6%.

Sales from the Food Processing Equipment Group (representing 15.4% of the reported quarter’s net sales) were $121.5 million, increasing 2% year over year. Excluding the impact of forex woes and buyouts, sales decreased 3.9% year over year.

For 2019, the company’s sales were $2.96 billion, reflecting growth of 8.7% from the previous year. Also, the top line surpassed the Zacks Consensus Estimate of $2.94 billion.

Margin Profile

In the quarter under review, Middleby’s cost of sales rose 4.6% year over year to $497.9 million. It represented 63.2% of sales compared with 62.9% in the year-ago quarter. Gross profit grew 3.2% year over year to $289.7 million. Gross margin decreased 30 basis points (bps) to 36.8% due to the adverse impacts of movements in foreign currencies and low-margin acquisitions.

Selling, general and administrative expenses increased 6.7% year over year to $148.8 million. It represented 18.9% of sales in the reported quarter. Operating income in the quarter under review improved 8.6% year over year to $152 million. Operating margin rose 80 bps year over year to 19.3%.

Net interest expenses and deferred financing amortization totaled $19.3 million, down from $20.4 million in the year-ago quarter. Effective tax rate in the quarter was 22.8% versus 26% in the year-ago quarter.

For 2019, the company stated that an increase in tariff costs played spoilsport.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Middleby had cash and cash equivalents of $94.5 million, up 8.4% from $87.2 million at the end of the last reported quarter. Long-term debt decreased 4.4% sequentially to $1,870.2 million.

In the quarter, the company generated net cash of $147.7 million from operating activities, reflecting growth of 26.4% from the year-ago quarter. Capital expenditure totaled $12.8 million versus $3.5 million in fourth-quarter 2018. Free cash flow increased 19% year over year to $134.9 million.

Outlook

In the quarters ahead, Middleby anticipates gaining from the focus on product innovation, improving selling techniques, solid offerings to customers and growth markets. Also, various profitability actions and acquired assets will likely be beneficial.

For the Commercial Foodservice Equipment Group, the company expects to benefit from supply-chain initiatives, facility consolidations, investments for enhancing technology capabilities and acquired assets. Notably, Middleby acquired Synesso, Evo, Powerhouse Dynamics, Ss Brewtech and Cooking Solutions Group in 2019. Also, the company sees growth opportunities in ghost kitchens, food delivery, ventless cooking and specialty beverage. However, weak spending by restaurant chains might play spoilsport. The impacts of the Coronavirus outbreak might hit businesses in the first six months of 2020.

For the Residential Kitchen Equipment Group, Middleby anticipates gaining from Viking products as well as focus on product introductions and residential showrooms. Also, the acquisition of Brava in 2019 will likely bring more businesses in the quarters ahead.

For the Food Processing Equipment Group, innovation investment and improved backlog will likely aid its performance. In 2019, the company acquired Pacproinc.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, Middleby has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Middleby has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.