Covid-19 hammered the restaurant business—and its suppliers, like restaurant equipment maker
—hard. But with the economy recovering and eateries reopening, Welbilt stock looks like a buy.
It’s been a miserable year for restaurants. Sales fell 27% last year, as in-person dining disappeared and restaurants were shuttered. And when no one is going to restaurants, the businesses don’t buy new ovens, which caused revenue at Welbilt (ticker: WBT), which makes deep-fryers that
(MCD) uses to cook its french fries, among other products, to tumble about 27% in 2020. Its stock, at a recent $15.70, is up just 2% from its level at the end of 2019, even as the
has climbed 33%.
With vaccinations rising and sites reopening, the industry is starting to recover. Investors should focus on what made it attractive before Covid-19 struck: growth, profitability, innovation, and an attractive industry structure. Add in a dash of company-specific factors, and Welbilt looks well placed to cook up future gains.
Welbilt is a reopening play. Sales started to recover in the second half of 2020, and are growing quarter over quarter. The recovery won’t be smooth and it won’t be even—pizza and fast-food are already doing well, while table-service establishments are only starting to revive—but a recovery is happening. “Different end markets will come back at different speeds,” says Welbilt treasurer Rich Sheffer.
There’s more to restaurant supply than just the economic recovery. Supplying restaurant equipment isn’t a particularly big business—sales total about $40 billion annually, a far cry from the trillions spent on cars, phones, and houses—but it has been a steady one, driven by the need to constantly improve labor efficiency.
The industry also is very fragmented. Welbilt and
(MIDD), two dominant publicly traded players, control just 10% of the overall business. The lack of consolidation isn’t a problem, however. It means that equipment companies can add to growth by purchasing small operators. Middleby made almost 30 acquisitions over the past five years, though most aren’t large enough to disclose terms.
Technology is a new driver of growth. Welbilt and Middleby are both connecting assets to the cloud, which means menus can be downloaded automatically, instead of manually, while employee training becomes easier.
Welbilt’s Sheffer also points to technology being used to monitor oil quality, which can improve food quality and save money. These kinds of digital improvements will lead to more consolidation because not everyone will be able to afford the investment required to offer them or the continued technical support that’s needed. “We’ve heard from a lot of customers that it reduces training costs, helps employee retention,” adds Sheffer.
Middleby is a fine stock. It has returned nearly 19% annually, on average, over the past 10 years. The
can boast only about 14% a year over that span. Don’t be surprised if Middleby continues to be a strong, consistent performer.
But Barron’s prefers Welbilt. The New Port Richey, Fla., company was spun out of crane manufacturer
(MTW) in 2016, saddled with more than $1.3 billion in debt. That amounted to almost six times earnings before interest, taxes, depreciation, and amortization, or Ebitda. That’s far too much, but it is, counterintuitively, a reason to like the stock today.
Management has committed to trimming that debt to about 3.5 times Ebitda in coming years, making Welbilt a classic deleveraging story. Right now, Welbilt’s enterprise value—the sum of its debt and $2.2 billion stock-market capitalization—is about $3.5 billion. As free cash flow is used to pay down obligations, there’s a shift of value from debt to equity.
Welbilt, meanwhile, has demonstrated the ability to generate about $150 million in free cash flow in a good year. That adds about 7% annually to the stock price, just from paying down debt. And that’s without taking into account the industry’s recovery and growth.
Welbilt should also be able to improve its profit margins. Prepandemic, they were about 10%, about half of Middleby’s 20%-plus. When CEO Bill Johnson took over in late 2018, he laid out a goal to improve its margins. Covid-19 got in the way.
With the recovery continuing, margins should start rising again. “New management remains committed to improving margins to close the gap with peers,” writes Baird analyst Mig Dobre, who has a Buy rating on the stock, with a price target of $18, about 15% higher than recent levels.
Johnson’s goals don’t look heroic. One peer,
Illinois Tool Works
(ITW), posted a 26% operating margin in its food equipment business back in 2019, the year before Covid struck.
With better margins and less debt, Welbilt could earn $1 a share by 2023, more than double 2021’s estimate of 41 cents. Even at a price/earnings ratio of 20, down from a current 38 times earnings, the stock could trade north of $20 in a couple of years.
If you can stand the heat, it’s time to get into this kitchen.
Write to Al Root at [email protected]