The Middleby Corp (NASDAQ:MIDD)

Great company!

The present price places the PE under 20. Fiscal 2011 should see restaurant sales up for the first time in three years.

One of the growth drivers for Middleby’s is the need for restaurants to retrofit their kitchens to increase efficiency. Even if the old oven is working well, new models offer a smaller footprint, higher energy savings and can cook faster. Speed means food gets out faster. Energy savings can be huge for restaurants. It takes a lot of electricity to run restaurant ovens. A small footprint gives companies room to add more equipment to expand their menus to better compete with other restaurants. These new products offered by Middleby that increase energy savings also carry higher margins.

Other companies are working on energy saving ovens and equipment, but the big players such as Manitowoc (MTW) Illinois Tool Works (ITS) and Middleby due to their size should have a big advantage over smaller players and should continue to pick up market share in the industry. They have the experience to build products that not only saves energy but keeps food quality high. Part of Middleby long-term practice was to work with customers to accumulate data on what makes a good oven and they have used the input from a huge customer base to design products that not only make the kitchen more efficient and cheaper to run, but keeps the attributes that keeps food quality high. This is where I think Middleby excels and what makes it tougher for smaller companies to succeed in the industry.

The restaurant industry is expected to make a bit of a comeback in 2011. Fewer restaurant closures and business sales are being reported. This could change if oil prices continue to go up, but fortunately they seem to be going down a bit thanks to higher margins requirements which is derailing speculators. If this trend continues, the restaurant industry may show signs of improvement. Regardless the restaurant survivors will be looking to find ways to give them an edge in costs, faster cooking times or ways to expand their menus to compete with strong competitors. I think this will keep Middleby busy.

Their valuation in my opinion is very good. The PE is 20.88. The cash flow yield is down some, but the first quarter tends to be the weakest for cash flow and they expect to report strong cash flow going forward in 2011. Timing of some orders also may boost cash flow in upcoming quarters. I think it was a good quarter and I look forward to better things as the rest of 2011 is reported.