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On Jul 23, 2013, we downgraded our recommendation on The Middleby Corporation (MIDD - Analyst Report) to Neutral from Outperform, based on the company’s over dependence on food processing units.

Why the Downgrade?

Middleby is over dependent on the expenditures made by the food processing companies. Therefore, a change in the spending pattern of the food chain owners will impact the company’s revenues.

The volatility of the raw material prices also impacts the company’s strategies. The company uses steel as the main raw material, which accounts for roughly 15%-20% of the total cost of sales. The prices of steel often fluctuate affecting the company’s profitability. This in turn impairs the company’s accurate margin projection.

Europe is a major contributor to Middleby’s revenues. The continuous headwinds faced by the company in the region have hit its international revenues hard. Per the company, the European markets will remain weak in the quarters ahead, which may have a negative impact on the revenues.

However, huge contributions from various acquisitions cannot be negated. Middleby’s latest acquisition of Viking is expected to significantly boost the earnings in the coming quarters. The company’s operations in Latin America, Middle East and Asia are flourishing well and are expected to continue in the coming quarters.

Middleby keeps inventing products to gain larger market share. The company’s “Kitchen of the Future” product was an instant hit with its customers. Along with this, the induction technology of the company is gaining momentum, thereby increasing revenue generation. It is expected that after the launch of 12 products in 2012, Middleby will launch around 13 products in 2013.

Other Stocks to Consider

Middleby currently carries a Zacks Rank #3 (Hold). Other stocks worth a look in the industry include Gorman-Rupp Co. (GRC - Snapshot Report), Chart Industries Inc. (GTLS - Snapshot Report) and Dover Corporation (DOV - Analyst Report). While Gorman-Rupp carries a Zacks Rank #1 (Strong Buy), Chart Industries and Dover Corporation carry a Zacks Rank #2 (Buy).

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