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Why Is Middleby (MIDD) Down 1.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for Middleby (MIDD - Free Report) . Shares have lost about 1.1% 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 drivers.

Middleby Q1 Earnings Top Estimates, Up Y/Y on Sales

Middleby reported better-than-expected results for the first quarter of 2019, delivering earnings beat of 0.73%. This was the company's second consecutive quarter of impressive results. Beside earnings, sales also surpassed estimates by 0.3%.

Middleby's adjusted earnings in the reported quarter were $1.38 per share, surpassing the Zacks Consensus Estimate of $1.37. Further, the bottom line increased 16.9% from the year-ago quarter figure of $1.18 on the back of sales growth and improved gross margin.

Organic Sales and Acquired Assets Drive Revenues

In the quarter under review, Middleby's sales were $686.8 million, reflecting year-over-year growth of 17.4%. Organic revenues in the quarter grew 2.9% year over year. Acquired assets increased sales by 17.2% while unfavorable movements in foreign currencies had a negative impact of 2.1%. Closure of non-core business had a negative 0.6% impact.

Also, the top line surpassed the Zacks Consensus Estimate of $685 million.

On a geographical basis, the company's net sales in the United States and Canada increased 10.1% year over year to $441.2 million. Sales in Asia were $58.4 million, up 61% year over year, and in Europe and the Middle East was $161.1 million, up 23.6% year over year. Latin America sales totaled $26.1 million, increasing 48.8% year over year.

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

Sales from Commercial Foodservice Equipment Group (representing 66.6% of the reported quarter's net sales) were $457.5 million, increasing 27.1% year over year. Organic revenues in the quarter grew 3.4%.

Sales from Residential Kitchen Equipment Group (representing 19.9% of the reported quarter's net sales) totaled $136.8 million, increasing 0.4% year over year. Organic sales in the quarter grew 5.5% on the back of growth in Viking.

Sales from Food Processing Equipment Group (representing 13.5% of the reported quarter's net sales) were $92.5 million, increasing 4.4% year over year. Organic sales decreased 3.2% year over year.

Gross Margin Improve

In the quarter under review, Middleby's cost of sales increased 15.1% year over year to $429.5 million. It represented 62.5% of sales compared with 63.8% in the year-ago quarter. Gross profit increased 21.6% year over year to $257.3 million. Gross margin increased 130 basis points (bps) to 37.5%, driven by strength in the Residential Kitchen Equipment segment.

Selling, general and administrative expenses increased 18.6% year over year to $145.8 million. It represented 21.2% of sales in the reported quarter. Operating income in the quarter under review increased 16.2% year over year to $101.1 million. Operating margin declined 20 bps to 14.7%.

Net interest expenses and deferred financing amortization totaled $20.5 million, up from $8.8 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the first quarter, Middleby had cash and cash equivalents of $81.2 million, up 13.4% from $71.7 million at the end of the last reported quarter. Long-term debt was roughly flat sequentially at $1,889.3 million.

In the quarter, the company generated net cash of $33.9 million from operating activities, decreasing 24.1% from $44.7 million generated in the year-ago quarter. Capital spent on the addition of property and equipment totaled $8.1 million, decreasing 51.4% from $16.7 million used in the previous-year quarter.

During the quarter, the company used $5.3 million for repurchasing treasury stocks.

Outlook

For 2019, Middleby anticipates its focus on innovation and strength in beverage end market as well as increasing adoption of automated conveyor and ventless cooking equipment to prove beneficial for its Commercial Foodservice Equipment Group. Business with major restaurant chains will continue to flourish while internationally, it may face hurdles in Europe and the U.K. markets.

The company also noted that acquisitions, including Cooking Solutions Group (April 2019), EVO America and Crown Food Service Equipment (December 2018), Taylor Company (June 2018), Josper (May 2018), Firex (April 2018), and some assets of JoeTap (March 2018) will help solidify Commercial Foodservice Equipment Group.

For Residential Kitchen Equipment Group, the company anticipates gaining from its Viking business and focus on product introductions. North America businesses are likely to flourish in the year while 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?

Fresh estimates followed a downward path over the past two months.

VGM Scores

Currently, Middleby has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. 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

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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