April 15, 2020

Middleby Corp. | MIDD

We believe Wall Street is overly optimistic about Middleby's ability to recover from the devastating impact that the COVID-19 pandemic will have on the restaurant industry

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The Middleby Corporation (NASDAQ: MIDD) is one of the largest providers of industrial kitchen equipment to quick-and full-service restaurants, retail outlets, and hotels. This industry has unfortunately been devastated by the COVID-19 pandemic and we believe the impact on Middleby will be much larger than current projections.

After a months-long investigation that included a deep forensic analysis of the company’s financial statements and interviews with key distributors and restaurant industry experts, Prescience Point believes Wall Street is overly optimistic about the company’s ability to recover from the devastating impact that the COVID-19 pandemic will have on the restaurant industry.

Middleby had already been struggling before COVID-19 as many of its large restaurant chain customers pushed out capex and delayed projects.  For years, Middleby was able to hide deteriorating organic growth with progressively larger but lower quality acquisitions. As demand starts to disappear and leverage nears all-time high, Middleby’s debt-fueled roll-up strategy is set to implode.

Restaurants are permanently closing their doors at a record pace, over-levered chains are cutting unit growth & capex, large franchisee groups teeter on the edge of bankruptcy, and a flood of lightly used equipment is about to hit the market. Yet, Wall Street expects Middleby to have a “V” shaped recovery and post record profit and margins in fiscal year 2021. We believe this is nearly impossible.

According to interviews with key players, foodservice equipment purchases are down as much as 85% and many large foodservice equipment distributors are gearing up for a wave of used equipment about to hit the market. In addition, we were told some distributors were working with suppliers to return inventory as the new equipment market could all but dry up.

We value Middleby’s shares at $26.91, implying 50% downside.

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