Time to Buy Middleby?

If you own shares of oven maker and Motley Fool Hidden Gems recommendation Middleby (Nasdaq: MIDD), you may have noticed that they're not worth quite as much as they were before earnings. And if so, you're probably wondering whether the news was bad, and whether it was sufficiently bad as to justify a sell-off.

I'm here to tell you that yes, it was bad -- but no, it wasn't that bad. Not by half:

• Sales slipped nearly 9% in the fiscal second quarter, to $158.6 million.
• Profits took even more of a beating, dropping 25% to $0.74 per share.
• And as you can guess, profit margins declined as well. So far this year, the company's running on a 17% operating margin, so a full 170 basis points lower than last year.

Yet that 17% operating margin beats out rival restaurant equipment maker Illinois Tool Works (NYSE: ITW) by 710 basis points. Why, even John Bean Technologies (NYSE: JBT), of whom I spoke so highly last week, only pulls down a 10.3% operating margin, or less than two-thirds of what Middleby gets.

Perhaps the most astounding factoid contained in Middleby's report: Since acquiring TurboChef, Middleby hasn't just turned around its historically unprofitable rival, but boosted operating margin there to nearly 20%! We've come a long way from fears that TurboChef would drag down profits at Middleby. With things looking less bleak at Starbucks (Nasdaq: SBUX) and even looking up for Whole Foods (Nasdaq: WFMI) -- two of TurboChef's marquee customers -- it may actually become a profit driver.

Self-cleaning debt oven
Last but not least, Middleby tackled my main reservation about the stock -- its rapid buildup of debt post-TurboChef. Despite spending $11.4 million on two acquisitions in Q2, Middleby knocked $25 million off its debt load last quarter, dropping it to $321 million. And here's where Middleby's prodigious prowess in generating cash comes into play. Free cash flow for the past 12 months amounts to nearly $84 million. Were it to cease acquiring competitors, and focus exclusively on debt elimination, Middleby could pay off its debt in relatively short order.