Investor Essentials Daily

This kitchen supplier stands to benefit from rate cuts

May 16, 2024

The consensus is that U.S. interest rates have peaked and will likely decline, which could boost various industries by lowering financing costs. 

Middleby (MIDD), a leading global manufacturer of commercial food service equipment, is poised to benefit from this trend. 

Lower interest rates would enable easier funding for expansions and acquisitions for businesses like Middleby, and reduce borrowing costs for consumers. 

This is expected to increase demand for Middleby’s products in both the commercial and residential sectors. 

The company’s broad market presence and strategic position in industries like restaurant equipment and residential kitchen appliances, coupled with its attractive valuation metrics, suggest that it offers an attractive risk-reward profile for those expecting rates to trend downward in the coming quarters.

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The consensus among economists and analysts is that interest rates in the United States have likely peaked for this economic cycle and are poised to decline going forward.

This outlook is supported by recent strong jobs and wage growth data that is encouraging the Federal Reserve to cut rates in order to keep the record-long economic expansion on track. 

Lower interest rates would provide a tailwind for many industries by reducing financing costs for both businesses and consumers. Companies would have an easier time securing funding for investments and expansions, while households would see reduced borrowing costs for big-ticket purchases like homes, vehicles, and appliances.

While equipment manufacturers may not be the first sector that comes to mind, one company that is well-positioned to benefit from expected rate cuts is Middleby (MIDD).

Middleby is the largest global manufacturer and supplier of commercial food service equipment, with a diverse portfolio of brands serving both the restaurant and food processing industries.

Some of its major equipment lines include cooking, baking, refrigeration, and food preparation products sold under brands like Middleby Marshall, Lang, Blodgett, and U-Line. Middleby serves over 140 countries and has established a strong presence in both developed markets as well as high-potential emerging economies.

One of the key attributes that positions Middleby well for an interest rate decline is its dual exposure to both the commercial food service sector and the residential kitchen equipment market.

On the commercial side, Middleby supplies equipment to major restaurant brands and food service operators like Restaurant Brands International (QSR). Lower financing costs would aid these customers in funding new unit growth, renovations, and equipment purchases – translating to increased demand for Middleby’s products.

It also participates in the residential market sold through distributors to homeowners. Declining mortgage rates are expected to stimulate the housing sector, driving more kitchen remodels and renovations that incorporate high-end appliances.

Beyond its end-market exposure, Middleby also stands to directly benefit from lower interest rates in several other ways.

Easier access to debt financing allows Middleby to more cost-effectively fund acquisitions, an important part of its long-term growth strategy.

Lower rates reduce borrowing costs for its commercial customers, putting them in a better position to purchase Middleby’s equipment on credit or long-term payment plans. Rate cuts may stimulate the broader economy and support continued expansion in the food service industry, a positive for Middleby’s sales over the long run.

Additionally, our EEA shows that Middleby trades at 15.7x Uniform P/E and 4.4x Uniform P/B ratio. These historically low valuations suggest Middleby’s downside is limited at current prices, while the upside could be sizable from an economic boost driven by lower rates.

With its leadership position in commercial food service equipment and involvement in both new construction and remodeling activity in the residential sector, Middleby appears well-positioned to capitalize on an expected cycle of interest rate cuts.

Its dual end-market exposure provides multiple levers for growth as lower financing costs aid customers across its business segments.

At relatively inexpensive price levels today, Middleby may offer an attractive risk-reward profile for those expecting rates to trend downward in the coming quarters.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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