Middleby's Premium Is Gone, But Longer-Term Demand Destruction Is A Real Concern

For some time now I’ve stayed away from Middleby (MIDD) because I thought the market gave too much of a growth premium to a stock where the underlying company really wasn’t a true growth story anymore. Relative performance has indeed been poor over the last three years or so, as the company has struggled to put together compelling growth and margin leverage despite restructuring initiatives and ongoing reinvestment in product development.

I no longer think that premium valuation is a problem here. In fact, the shares look undervalued if the company can manage long-term annualized free cash flow growth of just 3% (from 2019’s level). That should be an achievable/beatable target, but I don’t want to underplay the risk that Covid-19 will cause long-lasting demand destruction in its core market, nor that management will continue to make questionable strategic and capital allocation decisions.

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Middleby's Premium Is Gone, But Longer-Term Demand Destruction Is A Real Concern