In my recent experience, used restaurant is selling at fire sale prices. This does not portend good things for restaurant equipment manufacturers, the food industry and maybe even the overall economy.
Manitowoc Food (MFS, Financial) has a market cap of $2.274 billion and trades at a price to earnings ratio of 25.35. The company operates under the brand names Frymaster, Lincoln, Garland, Delfield, Welbuilt and of course, Manitowoc. There are 3,000 distributors and 75% of sales are derived in the Americas, 15% Europe/Middle East/Africa and 10% in Asia and the Pacific. 58% of sales are to restaurants, 10% businesses, 8% retail, 6% education, 8% healthcare, 8% travel and 2% “other”.
For the latest quarter, the sales fell from $374.2 million in the second quarter 2015 to $368.4 million in second quarter 2016. This is after the sale of a division. That is a 1.5% fall. Earnings fell 59.1% from $36.9 million to $15.1 million. The balance sheet is a little scary. There is $41 million in cash and $101 million in accounts receivables. This is to $121 million in accounts payable and a whopping $1.370 billion in debt and lease obligations. Yikes!
Let’s talk about the restaurant business. To start a restaurant, you need a hood system to remove grease and a fire suppression system to put out any fires. Under the hood rests your stoves, ovens, fryers and anything else that cooks the food. The hood is connected to an exhaust fan that blows the hot air and smoke outside. Otherwise, the restaurant becomes smoky and smells like grease.
You basically need a refrigerator and freezer to keep the food, an oven to cook, a stove to cook, a griddle to cook burgers, a prep table to store sliced vegetables, an ice machine and a system to dispense fountain drinks, which is often provided by Coca-Cola (KO, Financial) or Pepsi (PEP, Financial) for free. It does not matter if it is a five star restaurant or kitchen at a resort, this is basically the set up. It needs to be inspected by the health department, fire department and several other entities. If you serve liquor and beer, you will need kegerators and more cooling but that is not a big deal.
Brand new, what I described above could run $30,000 or easily more. And here is the problem for Manitowoc and other equipment manufacturers: a restaurateur can go to auction and start up for as little as $4,000.
Gas ovens and stoves last for decades and do not need a lot of upkeep. Basically, you hook up the gas and light the pilot. Refrigeration equipment does not last as long but at the right price, it matters less. The same thing for ice machines. The fire suppression equipment and hood must always be inspected and cleaned so it has to work. No matter if you are in a Michelin rated restaurant or a fast food joint, often times, the equipment has been in five previous restaurants.
At a recent auction where I sold some equipment, everything went at fire sale prices. A top of the line Blodgett full size convection oven went for $211.29. Brand new the same oven goes for $4,295. Feel free to follow my links. I am not going to divulge the auction house because I do not want to drag them into this—it is not their fault this stuff is going cheap. A Southbend four burner range with an oven went for $105. Brand new, $1,545. A ten burner range went for $20. I do not know what brand but it is probably $3,000 new. A Manitowoc ice machine went for a little over $300. New, a comparable machine goes for $2,677. Cross town, another restaurant auction house would not even take my equipment. They were full. I checked a few different auctions around the country. Some stuff went dirt cheap and some 30% to 40% less than what it was selling for a year ago. I encourage you to do your own research.
Other companies in the space are Standex (SXI, Financial) and Middleby (MIDD, Financial). Standex has other divisions but Middleby has: Pitco, Viking, Blodgett and Southbend. These are top of the line ovens and stoves. Middleby has a market cap of $7.14 billion and trades at a price to earnings ratio of 28.26. Growth has been strong years and in the past four quarters. The most recent quarter showed $580 million in sales, $516 million before that, $539 million and $449 million. The problems that I have mentioned have not shown up yet. The balance sheet is far stronger than Manitowoc.
In my opinion, the weakness of these auctions is indicative of not just the food industry but of the economy as a whole. You won’t find this information looking through SEC filings—you need to literally get your hands dirty (and greasy). If you own these stocks, it is time to sell.
Disclosure: We own none of the stocks mentioned.
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