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On Sep 6, 2013, we reiterated our Neutral recommendation on The Middleby Corporation (MIDD - Analyst Report), based on solid second-quarter 2013 results.

Why the Retention?

Middleby reported strong results for the second quarter of 2013, with earnings per share of $2.00, increasing 19.8% from the year-ago quarter. Earnings beat the Zacks Consensus Estimate of $1.79 per share by 11.7%. Revenues increased 39.9% year over year to $363.8 million and were above the Zacks Consensus Estimate of $353.0 million. This was mainly a result of increased contributions of $76.1 million or 29.3% of sales from various acquisitions undertaken.

Management expects the business to grow further in the coming quarters on the back of acquisitions, accompanied by growth in the international markets. Moreover, the company is confident of the organic growth in the Commercial Foodservice Equipment Group and the Food Processing Equipment Group, in the coming quarters, based on better adaptability to new technologies.

Product launches by the company are also on a rise, with roughly 19 launches expected in 2013; 10 in the Commercial Foodservice segment and nine in the Food Processing segment.

The Zacks Consensus Estimate for 2013 has risen 4.2% in the last 60 days to $7.87 per share, reflecting an estimated year-over-year growth of 21.3%. For 2014, the Zacks Consensus Estimate increased 4.2% in the past 60 days to $9.25 per share, reflecting a year-over-year growth of 17.5%.

However, Middleby’s acquired companies deal in low-margin products. Increasing revenues from acquisitions lowers the margins for the company. Middleby reported gross profit margin of 37.5% in the second quarter of 2013, declining 170 basis points year over year. Excluding the acquisitions, gross margin for the company in the reported quarter was 39.4%.

Additionally, Middleby is greatly affected by volatility in the prices of raw materials. The company uses steel as the main raw material, which accounts for roughly 15%–20% of the total cost of sales. The fluctuation in steel prices impacts the company’s margins and profitability.

Other Stocks to Consider

Middleby currently carries a Zacks Rank #2 (Buy). Other stocks worth a watch in the machinery sector are Gorman-Rupp Co. (GRC - Snapshot Report), Graham Corp. (GHM - Snapshot Report) and Dover Corporation (DOV - Analyst Report). While Gorman-Rupp and Graham Corp. carry a Zacks Rank #1 (Strong Buy), Dover Corp. carries a Zacks Rank #2 (Buy).

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