Separating Food Processing Unit Will Unlock Opportunities In Poultry And Pet Food Markets

Key Takeaways

• Separating the Food Processing business aims to unlock growth opportunities through strategic focus, impacting revenue growth for both entities.
  
• Innovation in kitchen equipment and market recovery investments are expected to enhance profitability and future growth.
  
• The planned business separation introduces execution risks and may affect revenue growth, with market recovery concerns posing a challenge to sustained earnings and profitability.

Catalysts

Designs, manufactures, markets, distributes, and services commercial restaurant, food processing, and residential kitchen equipment worldwide.

• The decision to separate the Food Processing business into a stand-alone public company aims to unlock growth opportunities through greater strategic and operational focus, potentially impacting the revenue growth of both entities.
  
• Middleby Food Processing's strong growth potential is supported by its position as a full-line solutions provider, with expansion into adjacent market segments like poultry and pet food, which could enhance future organic revenue growth.
  
• Middleby plans to capitalize on innovation in the Commercial and Residential Kitchen Equipment business, with a focus on automation, electrification, and IoT connectivity, which could drive future revenue and earnings growth.
  
• The recovery in the Residential business, aided by investments in sales, marketing, and new product launches, is expected to enhance profitability and revenue growth as market conditions improve.
  
• Ongoing share repurchase plans and the optimization of capital structure post-separation are expected to contribute to earnings per share growth for the stand-alone Middleby Corporation.

Middleby Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Middleby's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.1% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $537.3 million (and earnings per share of $10.36) by about March 2028, up from $428.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.3x on those 2028 earnings, up from 19.2x today. This future PE is greater than the current PE for the US Machinery industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

Middleby Future Earnings Per Share Growth

Risks

• The planned separation of the Middleby Food Processing business into a stand-alone public company introduces potential execution risks and may lead to temporary dis-synergies, potentially affecting both revenue growth and operating margins for each separate entity.
  
• The forecast for modest organic revenue growth in 2025 due to slower-than-expected market recovery in the Commercial and Residential Kitchen Equipment businesses raises concerns about sustained revenue growth in the near term.
  
• Persistent macroeconomic challenges, particularly in commercial and residential segments, indicate potential delays in demand recovery which could pressure overall earnings growth.
  
• Market conditions, including fluctuating food costs and variable customer traffic patterns, present risks to consistent operational performance, which might impact both revenue predictability and net margins.
  
• The reliance on near-term acquisition integration for margin expansion in the Food Processing segment suggests potential short-term pressures on profitability if integration challenges arise, affecting net margins negatively.

Valuation

• The analysts have a consensus price target of $180.0 for Middleby based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $205.0, and the most bearish reporting a price target of just $150.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $537.3 million, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 7.8%.
• Given the current share price of $153.44, the analyst price target of $180.0 is 14.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.