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Why Is Middleby (MIDD) Down 4.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Middleby (MIDD - Free Report) . Shares have lost about 4.5% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Middleby Q2 Earnings Surpass Estimates, Decline Y/Y

Middleby reported better-than-expected results for second-quarter 2020, with earnings surpassing estimates by 34.15%. This is the company’s fourth consecutive quarter of impressive results. Also, sales in the second quarter surpassed estimates by 4.59%.

The company’s adjusted earnings in the reported quarter were 55 cents per share, surpassing the Zacks Consensus Estimate of $1.72. However, the bottom line decreased 69.4% from the year-ago quarter figure of $1.80 due to weak sales generation and lower margins.

Revenue Picture

In the quarter under review, Middleby’s sales were $472 million, reflecting a year-over-year decline of 38%. Organic revenues in the quarter declined 39.8% year over year due mainly to difficulties caused by the pandemic. Acquired assets grew sales by 2.3%, while unfavorable movements in foreign currencies had a negative impact of 0.5%.

However, its net sales surpassed the Zacks Consensus Estimate of $451 million.

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

Sales from the Commercial Foodservice Equipment Group (representing 56.7% of the reported quarter’s net sales) were $267.5 million, decreasing 47.9% year over year. Sales, excluding the impact of forex woes and buyouts, fell 49.4% year over year in the quarter.

Sales from the Residential Kitchen Equipment Group (representing 21.8% of the reported quarter’s net sales) totaled $102.9 million, declining 31.3% year over year. Sales (excluding the impact of forex woes, end of non-core businesses and buyouts) in the quarter declined 32.2% year over year.

Sales from the Food Processing Equipment Group (representing 21.5% of the reported quarter’s net sales) were $101.6 million, increasing 3.8% year over year. Excluding the impact of forex woes and buyouts, sales decreased 1.2% year over year.

Margin Profile

In the quarter under review, Middleby’s cost of sales decreased 32.8% year over year to $318.9 million. It represented 67.6% of sales compared with 62.4% in the year-ago quarter. Gross profit fell 46.5% year over year to $153.1 million. Gross margin decreased 520 basis points (bps) to 32.4%.

Selling, general and administrative expenses decreased 22.7% year over year to $111.8 million. It represented 23.7% of sales in the reported quarter. Operating income in the quarter under review decreased 72% year over year to $39.1 million. Operating margin fell 10 percentage points year over year to 8.3%.

Net interest expenses and deferred financing amortization totaled $21.8 million, down from $22 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter, Middleby had cash and cash equivalents of $649.7 million, surging 70.5% from $381 million at the end of the last reported quarter. Long-term debt grew 9% sequentially to $2,373 million.

In the second quarter, the company generated net cash of $77.6 million from operating activities, reflecting growth of 14.8% from the year-ago quarter. Capital expenditure totaled $4.2 million versus $13.5 million in second-quarter 2019. Free cash flow increased 35.8% year over year to $73.5 million.

Outlook

In the quarters ahead, Middleby anticipates gaining from product launches, innovation efforts, focus on strengthening supply chain and cost-saving actions. Also, the company anticipates generating positive cash flows in the rest of 2020, while also cut down on its capital spending.    

For the Commercial Foodservice Equipment Group, the company expects to benefit from improved demand from healthcare and retail end markets. Also, demand pick-up is expected from convenience stores, pizza and quick-serve restaurants.

For the Residential Kitchen Equipment Group, the company expects improved demand, especially in the U.K. and the U.S. markets, to be beneficial and drive performances.

For the Food Processing Equipment Group, innovation investment and improved backlog will likely aid its performance. However, disruptions caused by the pandemic might hurt near-term orders.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 20.36% due to these changes.

VGM Scores

Currently, Middleby has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, 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 upward for the stock, and the magnitude of these revisions looks promising. 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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