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Middleby (MIDD) Down 1.5% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Middleby (MIDD - Free Report) . Shares have lost about 1.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Middleby due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Middleby Q2 Earnings Lag Estimates, Up Y/Y on Sales

Middleby reported weaker-than-expected results for the second quarter of 2019, with earnings lagging estimates by 4%. This came in after the company recorded two consecutive quarters of better-than-expected results. Beside earnings, sales also lagged estimates by 1.8%.

The company’s adjusted earnings in the reported quarter were $1.70 per share, lagging the Zacks Consensus Estimate of $1.77. However, the bottom line rose 6.9% from the year-ago quarter figure of $1.59 on improved organic sales, acquired assets and margin growth.

Organic Sales and Acquired Assets Drive Revenues

In the quarter under review, Middleby’s sales were $761 million, reflecting year-over-year growth of 13.9%. Organic revenues in the quarter grew 1.3% year over year. Acquired assets grew sales by 14.7% while unfavorable movements in foreign currencies had a negative impact of 1.6%. Closure of non-core business had a negative 0.5% impact.

However, its net sales lagged the Zacks Consensus Estimate of $775.2 million.

The company reports net sales under three segments. A brief discussion of those segments is provided below:

Sales from Commercial Foodservice Equipment Group (representing 67.5% of the reported quarter’s net sales) were $513.3 million, increasing 23.9% year over year. Organic revenues in the quarter grew 2.3%.

Sales from Residential Kitchen Equipment Group (representing 19.7% of the reported quarter’s net sales) totaled $149.9 million, decreasing 6.5% year over year. Organic sales in the quarter declined 2.6%.

Sales from Food Processing Equipment Group (representing 12.8% of the reported quarter’s net sales) were $97.9 million, increasing 4.5% year over year. Organic sales grew 3.4% year over year.

Gross Margin Improves Y/Y

In the quarter under review, Middleby’s cost of sales rose 13.7% year over year to $474.5 million. It represented 62.4% of sales compared with 62.5% in the year-ago quarter. Gross profit grew 14.2% year over year to $286.5 million. Gross margin rose 10 basis points (bps) to 37.6%.

Selling, general and administrative expenses gained 7.1% year over year to $144.6 million. It represented 19% of sales in the reported quarter. Operating income in the quarter under review improved 25.4% year over year to $139.6 million. Operating margin rose 170 bps year over year to 18.4%.

Net interest expenses and deferred financing amortization totaled $22 million, up from $10.4 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter, Middleby had cash and cash equivalents of $81.7 million, up 0.6% from $81.2 million at the end of the last reported quarter. Long-term debt rose 5.4% sequentially to $1,992 million.

In the quarter, the company generated net cash of $67.6 million from operating activities, decreasing 33.7% from $101.9 million generated in the year-ago quarter. During the quarter, the company used $167.3 million for acquisitions.

Outlook

For 2019, Middleby anticipates its focus on innovation, increasing adoption of automated products and ventless cooking equipment to prove beneficial for its Commercial Foodservice Equipment Group. Business with major restaurant chains will continue to flourish while it may face hurdles in Europe, the U.K. and China markets. Further, acquired assets will be a boon. Effective actions to improve margins will be a priority.

For Residential Kitchen Equipment Group, Middleby anticipates gaining from its Viking business and focus on product introductions. Uncertainties in international operations, especially in the U.K., might be concerning.

For Food Processing Equipment Group, product innovation and launch of products will benefit results while issues related to the meat processing line of operations might be concerning.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.46% due to these changes.

VGM Scores

At this time, Middleby has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Middleby has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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