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 The $5.2 billion market cap company's commercial ovens and food
processors can be found in any Panera Bread, Chipotle or Starbucks,
all of which have been offering what analysts call "fast casual" – a
category a step above fast food that has been successful at drawing
middle income consumers away from competitors like McDonald's.
That push away from Big Macs has spurred Middleby's revenue growth,
which hit 14 percent in its current fiscal year, and prompted 81
mutual funds, including those from firms including William Blair and
Putnam, to add its shares to their portfolios for the first time
last quarter, a jump of 72 percent from the previous quarter,
according to Morningstar data.
As a result, Middleby's stock is up 16 percent this year, or about 5
percentage points more than the benchmark Standard & Poor's 500
index. Five of the six analysts tracked by Reuters who cover the
company see its shares rising by an average of 11 percent in 2015 as
the company expands the offerings of its Viking line of home ovens,
grills and refrigerators. A top-of-the-line Viking oven can cost as
much as $17,000.
Yet the high expectations for the stock also come with a downside:
any hint that the Elgin, Illinois-based company's growth may be
slowing will likely send shares tumbling, analysts said. The company
trades at a forward price-to-earnings ratio of 22.9, well above
competitors such as Manitowoc Company Inc and Thermador Groupe SA.
"This is a stock that always looks expensive, but it somehow finds a
way to grow into the multiple," said C. Schon Williams, an analyst
at BB&T.
STRONG EXECUTIVE
One reason behind the optimism is chief executive Selim Bassoul, 57.
Since taking on the job in 2000, Bassoul has acquired 37
competitors, bringing in technology ranging from frying systems to
ice makers to wine preservation, according to Great Lakes Review, a
Cleveland-based research firm focusing on small-cap stocks.
A native of Lebanon with an MBA from Northwestern University in
Evanston, Ilinois, Bassoul bought Viking Range Corp. in 2012.
Middleby said Bassoul was traveling this week and unavailable to
comment.
Bassoul "has an incredible ability to make his own equipment
obsolete and everybody else's," prompting restaurant customers to
continually upgrade, said Elliott Schlang, the head of Great Lakes
Review. New products typically cut down significantly on cooking
time, as well as the amount of water and food waste that they
produce, decreasing restaurants' costs and shortening prep time. One
waterless steamer, for example, makes it possible to cook a lobster
in its own juices, slashing costs.
Those cost-cutting measures are especially attractive, given the
tepid growth rate of restaurant revenues in the U.S. The National
Restaurant Association, an industry trade group, estimates that
inflation-adjusted sales will grow just 0.2 percent this year at
restaurants that include table service, and 2.1 percent at locales
that offer more limited service.
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"Restaurant chains are having to innovate now that tastes are
changing," said Michelle Clayman, a co-manager of the Calvert
Capital Accumulation Fund. That, along with an improving U.S.
housing market that should lead to more sales of residential Viking
ovens as buyers renovate new homes, should push shares of Middleby
up to $112, Clayman said, a 21 percent gain from its closing price
on Thursday of $92.83.
RISKS
Some analysts, however, say that Middleby's expansion plans may be
overblown.
Hamed Khorsand, an analyst at BWS Financial, has a price target of
$52 for the stock, or nearly half its current level.
The company's growth rate "has been dependent on a series of orders
that could end up being one time in nature," he wrote in a September
note to clients. The company also faces concerns about the safety of
food served at restaurants in China, which could slow expansion
plans by customers such as Yum Brands and Papa John's Pizza,
Khorsand said.
Matthew Litfin, co-portfolio manager of the William Blair Small-Mid
Cap Growth fund, said that the fact that Middleby's customers are
mainly large corporations should give it a steady income stream.
"These companies are going to stagger the investments that they are
making into their restaurants over a number of years," he said.
Schlang, the Great Lakes analyst, said that chief executive Bassoul
may himself be the greatest risk.
"Selim Bassoul is the gem behind the company," he said. “If anything
were to happen to him, we would have to reevaluate Middleby
immediately.”
(Reporting by David Randall. Editing by Linda Stern and John
Pickering)
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