onurdongel
Early in July I noted that I was warming up to the kitchen equipment manufacturer Middleby (NASDAQ:MIDD) after shares have seen a near 40% pullback from highs around the $200 mark at the start of the year. This made that a premium valuation has fallen towards 15 times earnings, albeit that leverage still came in around 3 times EBITDA here.
The Thesis
Middleby got involved into a bidding race for Welbilt in mid-2021, as the company awarded the target a $4.3 billion valuation, triggering a rally in the share price of Middleby towards $182 at the time. After Italian peer Ali Group got involved, the prospects for a bidding race put pressure on the shares, yet as Middleby backed out of the race, it was very comforting to see some discipline.
With earnings power trending at around $7-$8 per share ahead of any potential deal, the valuation came in at a twenty or low twenty times earnings multiple as the company embarked on a bolt-on deal making spree instead. After the summer, the company acquired Novy, a Belgian ventilation hoods manufacturer in a deal adding $90 million in sales. The purchase of Commercial Cooking Equipment a couple of months later added another $40 million in sales.
The company furthermore acquired Masterbuilt, the producer of the famous Kamado barbecues in a $385 million deal late in 2021, a transaction adding some $250 million in sales. The company furthermore acquired Char-Griller towards the end of 2021, in another deal adding $150 million in revenues.
All in all, these four deals added over half a billion in sales, as extrapolation of these deals made that the company appeared in good shape late in 2021 to deliver on earnings of $9-$10 per share, translating into a 20-22 times earnings multiple at the start of 2022. That said, I was a bit cautious given this valuation, as the company operated with $2 billion in net debt ahead of the deal making spree as leverage should likely increase quite a bit.
A Pullback
At the start of July, shares were down to $126, as shares were down 40% from their highs as it was around this time when I concluded that I was warming up to the company in this premium article.
In February of this year it was apparent that full year sales rose from $2.5 billion in 2020 to $3.2 billion, with the strong growth driven by deal making and a recovery in end markets. Operating profits came in at $630 million, including a $110 million termination fee from Welbilt, as a resulting $520 million operating earnings number translated into earnings of $7 per share. With EBITDA improving to $800 million, leverage was in check as the outlook for 2022 was getting challenged amidst the Russia-Ukraine conflict and inflationary pressures.
This was seen in the first quarter results. Even as first quarter sales were up 26% to $995 million, operating earnings were flat at $122 million, with net earnings down a bit. Adjusted earnings came in at $2.13 per share, which looks a bit short compared to the $9-$10 earnings range hoped to be achieved by myself. Despite the shortfall in first quarter earnings, which adds to relative leverage, Middleby continued with some bolt-on deal making. Towards the end of June, Middleby announced the purchase of Proxaut and Icetro, two deals adding $15 million and $40 million in annual sales, respectively. Adding 1.5% to pro forma sales, the contribution is modest, although no purchase price has been announced.
Given the backdrop I cut my estimate from $9-$10 in earnings per share towards $8 per share, yet with shares down from $200 to $126, the earnings multiple has dropped from 20 times to 15-16 times, even as the earnings guidance has been cut, creating an interesting set-up. On the other hand, leverage is inching up amidst deal making, certainly as a 2.5 million buyback program was announced as well, as I would like to see leverage ratios at or below 3 times. Despite this uncertainty, I was happily adding at $126 per share.
Last Month
Following a period of elevated deal making, Middleby has continued its acquisition strategy in July. In the middle of the month, the company announced its latest bolt-on deal. Middleby acquired CP Packaging, a manufacturer of advanced and high-speed vacuum packaging equipment in a transaction which adds some $15 million in sales. Towards the end of the year, the company reached a deal to buy Italian-based Colussi Ermes in a $50 million deal to acquire automated washing solutions for the food processing industry.
While no financial details have been announced for these deals, the combined revenue base adds about 2% to pro forma sales, as these bolt-on deal help to fend off pressure on the topline, albeit that margins are likely not that great in the second quarter, as the question is how net debt will evolve following continued deal making.
In the meantime shares have recovered a bit, having risen from $126 to $142, marking a healthy 12-13% gain in the time frame of just a few weeks. Given the fact that the outside world does not seem to have improved, I and I see risks to an $8.50 earnings per share number this year, I am a bit in doubt. Right now, I consider selling out of my position, something which I will probably do on any short term rip higher towards the $150 mark.
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