November 21, 2014 / 6:10 AM / 5 years ago

Fund managers buying Middleby, heat behind the fast-casual trend

NEW YORK (Reuters) - Middleby Corp, maker of high-end kitchen appliances for both professional and home cooks, has become a new favorite of fund managers as it benefits from changing American dining habits.

The $5.2 billion market cap company’s commercial ovens and food processors can be found in any Panera Bread, Chipotle or Starbucks, all of which have been offering what analysts call “fast casual” – a category a step above fast food that has been successful at drawing middle income consumers away from competitors like McDonald’s.

That push away from Big Macs has spurred Middleby’s revenue growth, which hit 14 percent in its current fiscal year, and prompted 81 mutual funds, including those from firms including William Blair and Putnam, to add its shares to their portfolios for the first time last quarter, a jump of 72 percent from the previous quarter, according to Morningstar data.

As a result, Middleby’s stock is up 16 percent this year, or about 5 percentage points more than the benchmark Standard & Poor’s 500 index. Five of the six analysts tracked by Reuters who cover the company see its shares rising by an average of 11 percent in 2015 as the company expands the offerings of its Viking line of home ovens, grills and refrigerators. A top-of-the-line Viking oven can cost as much as $17,000.

Yet the high expectations for the stock also come with a downside: any hint that the Elgin, Illinois-based company’s growth may be slowing will likely send shares tumbling, analysts said. The company trades at a forward price-to-earnings ratio of 22.9, well above competitors such as Manitowoc Company Inc and Thermador Groupe SA.

“This is a stock that always looks expensive, but it somehow finds a way to grow into the multiple,” said C. Schon Williams, an analyst at BB&T.

STRONG EXECUTIVE

One reason behind the optimism is chief executive Selim Bassoul, 57. Since taking on the job in 2000, Bassoul has acquired 37 competitors, bringing in technology ranging from frying systems to ice makers to wine preservation, according to Great Lakes Review, a Cleveland-based research firm focusing on small-cap stocks.

A native of Lebanon with an MBA from Northwestern University in Evanston, Ilinois, Bassoul bought Viking Range Corp. in 2012. Middleby said Bassoul was traveling this week and unavailable to comment.

Bassoul “has an incredible ability to make his own equipment obsolete and everybody else’s,” prompting restaurant customers to continually upgrade, said Elliott Schlang, the head of Great Lakes Review. New products typically cut down significantly on cooking time, as well as the amount of water and food waste that they produce, decreasing restaurants’ costs and shortening prep time. One waterless steamer, for example, makes it possible to cook a lobster in its own juices, slashing costs.

Those cost-cutting measures are especially attractive, given the tepid growth rate of restaurant revenues in the U.S. The National Restaurant Association, an industry trade group, estimates that inflation-adjusted sales will grow just 0.2 percent this year at restaurants that include table service, and 2.1 percent at locales that offer more limited service.

“Restaurant chains are having to innovate now that tastes are changing,” said Michelle Clayman, a co-manager of the Calvert Capital Accumulation Fund. That, along with an improving U.S. housing market that should lead to more sales of residential Viking ovens as buyers renovate new homes, should push shares of Middleby up to $112, Clayman said, a 21 percent gain from its closing price on Thursday of $92.83.

RISKS

Some analysts, however, say that Middleby’s expansion plans may be overblown.

Hamed Khorsand, an analyst at BWS Financial, has a price target of $52 for the stock, or nearly half its current level.

The company’s growth rate “has been dependent on a series of orders that could end up being one time in nature,” he wrote in a September note to clients. The company also faces concerns about the safety of food served at restaurants in China, which could slow expansion plans by customers such as Yum Brands and Papa John’s Pizza, Khorsand said.

Matthew Litfin, co-portfolio manager of the William Blair Small-Mid Cap Growth fund, said that the fact that Middleby’s customers are mainly large corporations should give it a steady income stream.

“These companies are going to stagger the investments that they are making into their restaurants over a number of years,” he said.

Schlang, the Great Lakes analyst, said that chief executive Bassoul may himself be the greatest risk.

“Selim Bassoul is the gem behind the company,” he said. “If anything were to happen to him, we would have to reevaluate Middleby immediately.”

Reporting by David Randall. Editing by Linda Stern and John Pickering

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