MGP Ingredients: Upside From Here Is Limited

Summary

  • MGP Ingredients has had a great run over the past couple of months, as strong fundamental performance has driven shares higher.
  • This trend looks set to continue and the long-term outlook for the company is promising.
  • However, shares are now more or less fully valued, leaving additional upside limited.
  • Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

At the end of a hard day

lucentius/E+ via Getty Images

Generally speaking, when investors talk about buying into a company that focuses on the production and sale of alcohol, they are generally referring to one of the major players in the market. But that's not all that exists out there. One smaller player, with a market capitalization of $2.13 billion as of this writing, is MGP Ingredients (NASDAQ:MGPI). Today, the company produces a variety of alcoholic beverages, including food-grade alcohol, fuel-grade alcohol, and a variety of branded spirits ranging from those that fit in the value category to those that are considered ultra-premium. In recent months, the company has seen its share price roar higher even as expectations for the 2022 fiscal year remain unchanged. Fundamental performance so far for this year is encouraging. However, shares are reaching the point where they are beginning to look rather lofty. Because of this, I have decided to reduce my rating on the company from a 'buy' to a 'hold'.

Growth remains strong

Back in March of this year, I wrote my first article on MGP Ingredients. In that article, I pointed out the company's attractive growth. In addition to boasting multiple years' worth of fairly consistent growth, with the 2020 to 2021 timeframe being particularly robust, I acknowledged that, while shares were not exactly cheap on an absolute basis, they were cheap relative to other players in the market. At the end of the day, this led me to rate the enterprise a 'buy' prospect, indicating my belief that upside, at least for the foreseeable future, should outpace that of the broader market. So far, the company has performed far better than I ever could have anticipated. Even though the S&P 500 is down by 3.1%, shares of MGP Ingredients have soared by 22.4%.

Historical Financials

Author - SEC EDGAR Data

To be clear, the recent upside in the company's shares is not without cause. After seeing revenue skyrocket from $395.5 million in 2020 to $626.7 million in 2021, investors would be forgiven for thinking that there might not be any further upside for the business in the near term. However, that has not been the case. In the first quarter of the company's 2022 fiscal year, it reported revenue of $195.2 million. That's 80.2% higher than the $108.3 million generated just one year earlier. It is worth noting that some of the company's sales in Greece it came as a result of a merger with Luxco, an entity that was ultimately combined with the Branded Spirits segment of MGP Ingredients. However, growth for the company was broad-based. Under the Distilling Solutions segment, sales jumped 25.8% year over year, driven largely by an increase in the sales of brown goods within its premium beverage alcohol category. Even more impressive was the Ingredient Segment, which saw revenue rise by 46.2%. That improvement, management said, was largely as a result of increased sales of specialty wheat starches and proteins.

Historical Financials

Author - SEC EDGAR Data

As revenue increased, so too did profitability. Net income more than doubled, skyrocketing from $15.3 million to $37.1 million. The company did not benefit only from a rise in sales. Its actual net profit margin improved from 14.2% to 19.1%. Other profitability metrics followed suit. Operating cash flow jumped from $17 million to $22.2 million. The picture looks even more impressive if we strip out working capital adjustments. Doing this, cash flow would have risen from $21.3 million to $44.3 million. That's more than a doubling in profitability. Meanwhile, EBITDA also increased, rising from $25.7 million to $55.4 million. The company is definitely benefiting from economies of scale as it continues to expand.

When it comes to the 2022 fiscal year, management has high expectations. They currently believe revenue will be between $690 million and $715 million. At the midpoint, this would translate to a year-over-year increase of 12.1%. Another item that they gave guidance on was EBITDA. The company currently expects this to come in at between $150 million and $157 million. At the midpoint, that would imply a year-over-year improvement of 8.9%. When it comes to earnings per share, the current guidance is for a reading of between $3.95 and $4.10. At the midpoint and given the company's current share count, that should translate to profits of $97 million. That's 7.1% above the $90.6 million generated in 2021.

Trading Multiples

Author - SEC EDGAR Data

Using this data, we can effectively price the company. What I found, however, is that the stock is looking more expensive than it was previously. If we use our 2021 results, the firm is trading at a price-to-earnings multiple of 23.7. This compares to the 19.3 that it was trading for when I last wrote about it. A similar disparity can be seen when looking at 2022 estimates. The price to earnings multiple should be 22.2. That compares to the 18 that I got in my prior article. The price to adjusted operating cash flow multiple should come in at 20 if we use 2021 figures. That's up from the 16.2 in my aforementioned article. Similarly, the same metric for the 2022 fiscal year should climb from 14.9 to 18.3. And of course, there's always the EV to EBITDA approach. Using our 2021 figures, this is now a multiple of 16.7. That compares to the 13.9 it was in my aforementioned article. For the 2022 estimates, the number now comes in at 15.3. That's up from the 12.8 in my last article.

As part of my analysis, just like I did last time, I decided to compare the company to three other alcohol-oriented firms. On a price-to-earnings basis, these companies ranged from a low of 26.3 to a high of 60.2. Using the EV to EBITDA approach, the range was from 17.5 to 55.7. In both cases, MGP Ingredients was the cheapest of the group. If we use the price to operating cash flow approach instead, the range is from 17.3 to 33.9. In this case, only one of the three companies is cheaper than our target.

Company Price / Earnings Price / Operating Cash Flow EV / EBITDA
MGP Ingredients 23.7 20.0 16.7
Diageo plc (DEO) 26.3 22.1 17.5
Constellation Brands (STZ) 60.2 17.3 55.7
Brown-Forman Corporation (BF.A) (BF.B) 38.9 33.9 27.3

Takeaway

Based on the data provided, the fundamental picture for MGP Ingredients continues to improve at a nice clip. However, this does not make the company a great investment. Long term, I fully suspect the business will do well for shareholders. But given how pricey shares are starting to look, I do think that a recalibration of expectations is in order. Yes, it is true that shares are still cheap relative to similar firms. But these are larger companies that are more established and have a more comfortable market position. And on top of that, there is always a chance that the market for these types of firms is overpriced. Because of all of this, I have decided to reduce my rating in the company from a 'buy' designation to a 'hold' one.

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This article was written by

Daniel Jones profile picture
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Robust cash flow analyses of oil and gas companies

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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