Germany-based Rational AG (XTER:RAA, Financial) provides innovative solutions for thermal food preparation at professional kitchens. In 1973, the company was founded by Siegfried Meister, an electrical engineer. The idea was to cook using steam, which resulted from his disappointment with how the food was prepared at the restaurant chain where he worked. Fast forward to today and Rational is dominating over 50% of the global market for multifunctional appliances, with nearly 600 patents and utility models. According to FactSet, approximately 70% of the company is currently owned by insiders, mainly the founder’s family affiliates.
Rational operates two product lines – the flagship SelfCookingCenter (a combi-steamer with the intelligent cooking capability) and VarioCookingCenter (a complementary steamer originally developed by FRIMA). The company employs a global distribution network of 32 subsidiaries and over 4,000 partners to market its products to end-customers (45% serviced restaurants, 40% mass catering) in more than 120 countries and territories. As of the first nine months in 2019, Europe (including Germany) accounts for 57% of the total sales, followed by North America (19%) and Asia (14%). Revenue is generated mainly through the sales of cooking appliances (more than 70%), while after-sales activities such as accessories/parts, care products and consulting services accounting for the rest.
With a focus on innovative cooking for decades, Rational delivers its products with superior quality. The company employs more than 1,000 professional chefs in its R&D workforce. Its products serve not only many prestigious restaurants around the globe but also some unique settings, including the White House and Buckingham Palace. With over 1,000,000 units in the market, the Rational brand has become a standard in professional kitchens for quality and efficiency. Professional chefs are often under pressure to deliver high-quality meals under time constraints, and hence would not risk their operations (and reputations) by picking a lesser-known or unproven brand. According to Kantar TNS, Rational’s products outperform their industry peers worldwide in terms of both customer loyalty and satisfaction.
Per the chart below, Rational has long earned a higher return on capital than its major competitors Welbilt (WBT, Financial) and Middleby (MIDD, Financial).
In our opinion, the business should continue to benefit from several tailwinds, including the rising middle class in emerging markets, growing demand for healthier meals, continuous cost pressure in the restaurant industry and the ongoing consumer trend towards dining out. The management estimates a total market potential of 4 million combi-steamers and 2 million VarioCookingCenterd, compared with roughly 1 million combi-steamers and 35k VarioCookingCenter in the market.
On the risk front, we notice that the revenue model largely depends on the sales of the durable, non-recurring and large-ticket items. Such business is typically sensitive to macroeconomic conditions, and is therefore less predictable. As described below, the company’s total sales and operating income both experienced a decline throughout the Great Recession.
Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market; we own shares of Rational.
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