Middleby Corp Executive Summary - Report Example

Executive Summary The contents herein concern The Middleby Corp (NASDAQ GS:MIDD). The report addresses a general investigation of the company and itsbusiness model. It then advances an examination of future market occurrences, as well as investigating the industry that Middleby operates. In examining the overriding financial situation of the MIddleby Corporation several pertinent analyses are implemented; this analyses also function to forecast future financial developments. These analyses are supplemented by graphics to offer a more comprehensive visual representation of the company’s financial situation. Finally, the report includes a personal recommendation from the author, and a hypothetical recommendation from the owner of the Dallas Mavericks Basketball Club, Mark Cuban. Review of the company and its Business Key product lines: Convection, conveyer, and baking ovens (expected to generate high profits for the company). Proofers, broilers, fryers, char broilers, steam cooking equipment, vent-less cooking systems, coffee and tea brewers, and beverage dispensing equipment. Strengths: Serves a broad range of customers. Diversified products. Weaknesses: Heavy competition. The products they make are easily replicated. Strategic competitive advantage: Several money generating patents and unreleased intellectual property. Drivers for growth: If fast-food restaurants continue to increase their healthy menus, it will generate more income for Middleby by means of increased sales. Mergers with companies possessing a network of restaurants. Drivers for contraction: People may decide to save money and begin eating at home. Mergers may backfire due to lack of culture compatibility. Management capacity: The corporation has strong management capabilities as exhibited by past performance, and has the capability of expanding it to meet market increases in the long run, as well as, the short run. Government issues: No current known government issues at this time. Current elements that could affect valuation: Overall activity of the stock market. Recent Acquisition of CookTek LLC. Recent Acquisition of Anetsberger Brothers, Inc. Hidden Liabilities: Cost of the recent acquisitions and retraining the new employees will prove costly. No others are known at this time. Economic Forecast Real GDP is forecast to contract by 2.6% in 2009 as the financial crisis and the housing downturn take their toll on domestic demand. Massive fiscal and monetary stimulus will lead to a recovery of growth to 1.4% in 2010. Average consumer price inflation is set to turn negative in 2009 as a result of declining commodity prices. Inflation should turn positive again in 2010, but will remain low owing to the massive slack in the economy. The Feds forecasts show that its staff now expects the unemployment rate to rise to between 9.2% and 9.6% this year. The central bank had forecast in January that the jobless rate would be in a range of 8.5% to 8.8%, but the unemployment rate topped that in April, hitting 8.9%. Stock Market Forecast I believe the stock market will recover to pre-crash numbers by April of 2010. From there, prices should remain stable because investors will still be a little skeptical, and then rise at about 15% for three years to follow. Since Middleby’s stock has been farely stable in a falling economy, it is safe to assum that its growth will surpass the average market grown by 2% for the first 4 years. The S&P 500 will increase by 20% at this time of next year. The NYSE will lag behind the S&P at about 12-15% due to a changeover in executive management. Consumers will begin feeling comfortable trading in the stock market, followed by a scare, and again followed by confidence. A decrease in the number of companies traded in the exchange due to bankruptcies. An increase in the number of common stock holders (vs. industrial), due to the huge decline in stock prices. By mid 2010, the industrial investors will begin to regain their position as a major stockholder in the stock market by buying out many common investors Sector and Industry Forecast I expect the industry to increase steadily; however, I also expect Middleby to outpace the industry by at least 7%. I expect Middleby’s P/E ratio to double within the next 2-3 years, and almost be on level with the industry leaders. Many of the industry leaders are paying dividends, and I expect Middleby to follow suit in the near future; starting with a 5% annual dividend yield and gradually increasing it to a little above 10%. I expect the Middleby’s EPS growth rank within its industry to increase from the #6 position to the #5 position by the end of the year; and to move to the #4 position by the end of 2010. I expect Middleby’s fixed assets to increase by 15% in 2010, which in turn will cause a decline in the cash flows. This will be ultimately recouped by the year 2014 (3rd quarter). Ratio analysis (as of March 3, 2010) Return on Equity: 22.8 It shows that Middleby is efficient at generating profits from every unit in shareholder’ equity. Operating Margin: 18.32% Its means that Middleby has 18.32% of the company revenue left over. This is god because it is used to pay debt. Profit Margin: 9.39% Equals profit divided by sales, which is regarded as an index of operating efficiency Gross Profit Margin: 9.39% Gross profit margin is a financial ratio used to assess the profitability of a firms core activities. Current Ratio: 1.302 This shows that Middleby has enough resources to pay its debts over the next 12 months. Receivables turnover: 7.0 This is a good number for the industry. Return on Assets 10.04% Middleby is using its assets wisely. Asset turnover: 1.22 Shows great net sales when compared with what assets Middleby has available. Fixed Asset turnover: 14.2 Efficiency in which a firm used its current assets. Leverage ratio: 2.9 Looks at the long term risk burden of debt as a percentage of the business. Quick ratio: 0.7 This is average and shows Middlebys capability of meeting its debt obligations within the next 12 months. Company Financial Forecast and Valuation Middleby Margins and Price Forecasts as of March 03, 2010 Source: 10K 2012 2011 2010 2009 2008 2007 2006 Revenue 770 760 706 700 652 500 403 Revenue Growth 0.2605 0.26 0.25 0.240695 0.304 0.240695 0.271293 Gross Margin % 38.4 38.1 38.3 38.4 38.1 38.4 38.9 Opn. Icnome 136 132 126 93 120 93 77 Net Margin 10.8 10.6 10.8 10.5 9.8 10.5 10.5 Net Profit 68 66 64 53 64 53 42 Shares Out. 17 17 17 16 17 16 16 EPS 4.99 4.94 4.01 3.11 3.75 3.11 2.57 P/E 20.3 19.3 19.3 24.6 19.3 24.6 20.4 Stock Price 95.34 95.34 77.39 76.50 72.375 76.50 52.42 Discussion: The results seem to indicate that Middleby Corporation’s financial progression is well directed into the future; yet, it’s also clear that if a stock purchase is not made in the immediate future it could soon become overvalued. These finds, supplemented by the previous report, constitute substantial analytical information. The information demonstrates to a reasonable level that the company will continue its positive growth for the following five years. For current and prospective investors, the historical data demonstrates that the stock will increase at a minimal level. Source for both tables: diamond-hill.com Final recommendation: In regards to the market forecast and contemporary economic trends, my recommendation is to retain the stock. The company seems to have a strong foundation and will continue to grow. The industry is thriving, and the company is excelling within this industry. It’s clear the company will exist well into the future. The company has a diversified line of products, and owns several valuable patents and intellectual property. In addition, the company has a diversified customer base; this is pertinent as it lowers the risk factor. Potential analysis by Peter Lynch: The stock market is a complex entity that should only be participated in by competent professionals. If one has money already invested in the market they should sell their stock. It’s necessary to have near insider information to be able to determine when to buy, sell, or hold a stock. While one may have a small modicum of information, it’s likely that this is nothing compared to a regular employee at Middlebys. Ultimately, while Middlebys demonstrates positive growth, the chances that one will reap the returns they desire are unlikely. There are a large amount of competitors, and it’s near impossible to determine which company will succeed. References Diamond Hill Investments, "The Valuator." Web.5 March 2010. . Duprey, Rick. "A 1-in-100 Investor." 1 March 2010 Web.5 March 2010. . "Form 10-Q for MIDDLEBY CORP ." 25 February 2010 Web.5 March 2010. . Middleby Corp. (MIDD) 5 March 2010 Web.5 March 2010. . Ryniec, Tracey. "hart Industries, Inc. (GTLS): Zacks Rank Buy." 1 March 2010 Web.5 March 2010. . Zacks, "Zacks Releases Four Powerful Buy Stocks: Perfect World Co., Ltd, Corning Incorporated, RINO International Corp. and Middleby Corporation." 25 February 2010 Web.5 March 2010. Read More