Middleby's Recent Run Of Disappointments May Mark A Transition

With the shares down 20% over the last year, 10% over the last two years, and EPS misses in three of the last four quarters, there are clearly still some issues with Middleby (MIDD). This growth-by-M&A foodservice equipment vendor has long been a somewhat controversial name, but free cash flow margins have been eroding and so too as organic growth in its core Commercial Foodservice business.

If you invest long enough, you start to see patterns, and Middleby seems fit the pattern of a company that once consistently outgrew its end-markets, expanded its margins, and enjoyed robust valuation multiples as a reliable growth stock, but is now transitioning to a new phase of its cycle. These transitions are usually chaotic and are marked by revenue and margin volatility, as well as weaker valuations as the growth crowd moves on to greener pastures and new investors enter the mix.

I don't really know whether that is truly what's going on with Middleby, but the company is definitely losing the benefit of the doubt with Wall Street, and I believe revenue growth is likely to normalize into the mid-single-digits in the coming years. The valuation is getting more interesting, but the shares are likely to remain volatile until the company shows it can settle back into a new growth groove.

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Middleby's Recent Run Of Disappointments May Mark A Transition

Rational AG Has Significant Growth Potential, But The Market Knows It

Companies with returns on invested capital consistently above 30%, strong market share, and the potential to continue generating double-digit growth are hardly a dime-a-dozen, and I believe Rational AG (OTC:RTLLF) (RAAG.DE) has had uncommonly good results in no small part by maintaining a narrow focus on the foodservice equipment industry. More specifically, Rational AG pioneered the combi-oven concept and continues to focus its energies around a very limited product line-up built around saving space, labor, and operating costs in the commercial kitchen.

There a lot of very important "buts" to consider. First, Rational's ADRs have virtually no liquidity, so investors will have to look overseas (and even there its low share count doesn't lead to a lot of turnover). Second, insiders control the company. Third, the valuation is quite high as investors have rewarded the shares with a generous multiple as revenue has notably accelerated. Still, there is a large market opportunity waiting for Rational outside of Europe, management has shown it can run this business very well, and Rational would be an attractive target if or when those insider owners decided to sell.

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Rational AG Has Significant Growth Potential, But The Market Knows It

Without Major Improvements, Manitowoc Foodservice Looks A Little Overcooked

I can appreciate scarcity value, and I can appreciate the appeal of a company that enjoys strong share in a large, fragmented market and has only recently returned to sounder operating and management policies. Even so, it's hard for me to get comfortable with the valuation on Manitowoc Foodservice (NYSE:MFS). While I definitely think its "right-sizing" and margin improvement efforts will pay off, I think the company's business mix and the underlying growth potential of the foodservice industry are limiting factors.

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Without Major Improvements, Manitowoc Foodservice Looks A Little Overcooked

Seeking Alpha: Growth Still The Heart Of Middleby's Story

For an investor who sees himself as more value-oriented than growth-oriented, Middleby (NASDAQ:MIDD) is always challenging and frustrating. Built largely through acquisitions, the company has nevertheless posted revenue growth in the vicinity of 20% a year (annualized) over the past decade, with a doubling of FCF margins supporting even better FCF growth. What's more, it arguably doesn't get enough credit for growing and improving those assets it acquires.

Middleby remains a stretch from a DCF valuation perspective, or at least unless you're willing to assume double-digit revenue growth and FCF productivity well above the norms of the industry. That said, the price isn't so unreasonable from an EV/EBITDA standpoint, and the company is working on commercializing several concepts with significant revenue and margin potential.

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Growth Still The Heart Of Middleby's Story

Seeking Alpha: Middleby Continues To Defy Gravity

It says something about Middleby's (MIDD) valuation that a 20% pullback from its recent 52-week high still has the shares trading at around 15 times forward EBITDA. Then again, this is a company that continues to post organic revenue growth and profit growth well in excess of its industry peers while still looking at a large, mostly unpenetrated global market. While I can't really get all that comfortable with the valuation here, the operational story continues to be one of continued performance.

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Middleby Continues To Defy Gravity

Seeking Alpha: Middleby Has Lots Of "Guh", Not So Much "Arp"

Institutional investors have a knack for taking a page out of Wile E. Coyote's book when it comes to growth stocks - chasing them right off the edge of the cliff and into valuations based on thin air. This is in no sense meant as an indictment of the quality food equipment manufacturer Middleby (MIDD), as I believe this company is highly innovative and has numerous opportunities to grow its business over the next decade. At some point, though, even GARP investors have to acknowledge that this stock is trading a great deal more on the "Guh" part of the story than "a reasonable price".

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Middleby Has Lots Of "Guh", Not So Much "Arp"