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In May, I believed that MGP Ingredients, Inc. (NASDAQ:MGPI) had built up a nice niche position for itself. The company has been a savvy value creator in the premium alcohol segment, and has upped its focus on M&A in recent times.
After quite a few strong trends in recent years, MGP Ingredients has seen a resilient 2023 so far, amidst modest earnings growth and an interesting bolt-on deal. These (earnings) achievements have gone hand-in-hand with a stagnant share price, reducing valuation multiples quite a bit, with appeal seen here.
About MGP Ingredients
Founded during the second world war, MGP was designed to provide alcohol supply during the wartime period. After the business went public in the 1980s, shares were trading at just mid-single digits in the early 2010s.
With premium alcohol and spirits garnering more attention from investors, shares rose to the $80 mark in 2017, as shares broke through the $100 mark in the summer of 2022, as shares rallied to a high of $125 by year-end.
The goal of MGP Ingredients is to provide superior long-term financial results by participating in alcohol, spirits, and food ingredients segments.
The company posted $782 million in sales in 2022, with distilling solutions making up for just over half of sales at $428 million. The company posted gross margins around 30% from distilled spirits which go into bourbons, gins, whiskeys and vodkas.
Branded spirits was a $238 million business, although gross margins of 40% were superior to the distilling solutions business. The ingredients solutions business was the smallest business with a $116 million revenue contribution, while carrying the lowest gross margins of 27% as well. These activities focus on specialty wheat proteins and starches.
To put the revenue number of 2022 into perspective, we have to understand that the company has seen a huge boom in 2021 as a result of the $475 million acquisition of Luxco, which essentially meant that revenues doubled. With revenues reported at nearly $800 million in 2022, the company posted adjusted earnings of $4.94 per share, a solid earnings number.
Besides the M&A growth and solid operating performance, the company of course enjoyed a boom in spirits demand in recent years and during the pandemic.
2023 In Review
In May of this year, MGP Ingredients posted a 3% increase in first quarter sales to $201 million, with gross profits actually down 3%, resulting in operating profits being down 17% to $42 million. This meant that earnings fell by thirty cents, to $1.39 per share.
With 22 million shares trading at $100 per share, equity of the company was valued at $2.2 billion, or $2.4 billion if we factor in $196 million in (convertible) debt. Despite a tougher first quarter, the company guided for 2023 sales to come in around $825 million, plus or minus ten million, with EBITDA seen around $180 million. This should result in earnings of $5.05-$5.20 per share, which looked reasonable and justified a $100 per share valuation.
The company furthermore reached a deal in May, having acquired Penelope Bourbon in a $105 million deal, although earn-outs meant that the purchase price for this whiskey company could mean that the purchase price could essentially double over time.
Amidst all these moving targets, I saw appeal for MGP Ingredients, Inc. shares, but recognized the cyclicality in the past as well, as the company still recently closed on a huge deal, of course. Given all this, I placed shares on my watch list, and I am picking up coverage again here.
Trading Stagnant
After shares traded around the $100 mark in May, shares rallied to highs around $125 in August, before selling off to $95 per share at the moment of writing. What followed was the closure of the deal with Penelope, as the transaction closed on the first day of June.
In August, the company reported a 7% increase in second quarter sales to $209 million, results which included a month contribution from Penelope. Strong gross margin expansion made that GAAP operating profits increased a quarter to $44 million, bolstering margins in the process, as adjusted earnings rose by twenty-nine cents to $1.44 per share. While the company maintained the full year sales guidance, it hiked the EBITDA guidance and earnings guidance towards $5.35-$5.50 per share.
In November, the company reported a 5% increase in third quarter sales to $211.6 million, as growth slowed down despite the contribution from Penelope for the entire quarter. Reported earnings fell due to charges related to a distillery closure and an increase in the earn-out from the Penelope deal, although adjusted operating profits rose by 26% to nearly $43 million. Adjusted earnings per share advanced by twenty-eight cents to $1.34 per share.
On the back of the stronger underlying trends, the company provided an upbeat adjustment to the full-year outlook again. While sales are still seen at a midpoint of $825 million, adjusted EBITDA is now seen between $192-$197 million, with adjusted earnings now seen between $5.50 and $5.65 per share.
Net debt was reported at $286 million including convertible debt, as this worked down to a roughly 1.5 times leverage ratio, although it excludes a $66 million contingent consideration related to earn-outs of Penelope.
And Now?
A 20 times earnings multiple at $100 in May has come down a bit amidst a combination of a small pullback in the share price and increased earnings guidance, with MGP Ingredients, Inc. shares now trading at 17 times earnings. While the company has taken on a bit of leverage following the Penelope deal, this is nothing too worrying.
All this looks quite interesting, but investors might have some nerves as a result of the retirement of CEO David Colo, due at the end of the year, as Mr. Colo has been key to driving growth of the business in recent years, of course.
Believing that this change at the top position should not cause a massive disruption to the business, I like the overall setup for MGP Ingredients, Inc. a lot better already, as growth in the spirits segment surpassed growth in the wider food & beverage category. After all, the alcohol segment is not (as much) impacted by the whole trend around GLP-1 weight loss drugs.
At current levels, appeal starts to look evident, as I am willing to buy and gradually pick up a position in MGP Ingredients, Inc. on dips from here.
