MGP Ingredient's Misses Earnings, Stock Gets Crushed

The stock tripled from its 52 week low to 52 week high

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MGP Ingredients (MGPI, Financial) stock recently got waylaid as it missed quarterly earnings. The stock tripled from its 52 week low to 52 week high. The company has added a distilling division which has increased gross margins and helped fuel the stock’s rise.

Trailing four quarters earnings per share is $1.54. The stock trades at a price to earnings ratio of 22.65. The quarterly dividend is 8 cents and the dividend yield is 0.9%. Second quarter earnings were estimated at 40 cents, but came in at 37 cents. The stock got crushed. Sales were estimated at $89.2 million but came in at $80.4 million. There are 16.7 million shares and the market cap is $584 million.

The 52 week low is $16 and 52 week high over $43. When MGP missed second quarter estimates, the stock got slammed and fell from $42.43 to $34.20. Since then, it has recovered to $35.

For the last four quarters, sales were (from the most recent quarter): $80.4 million, $76.8 million, $81.5 million and $80.3 million for a total of $319 million. The stock trades at a sales to market cap ratio of 55%. The balance sheet is strong with $1.6 million in cash and $34 million in accounts receivable to: $21 million in accounts payable, $4.4 million in loans and $37 million in long-term debt. Long-term debt has increased by almost $7 million in the first half of the year.

The big story with MGP is that it has a growing spirits division. Many of what the consumer assumes are coming from small distilleries are actually made by MGP in its Lawrenceburg, Indiana, operation. MGP is one of the largest distillers of rye in the U.S. and even produces rye for George Dickel and Diageo (DEO, Financial). MGP produces 70% of U.S. rye and 35% of gin. The next time you are in a liquor store, turn over the bottle and see where it is distilled.

The company produces its own brand of whiskey under the name Metze’s Select. Metze’s retails for $75 a bottle. At the annual meeting in Atchison, Kansas, investor relations was kind enough to give attendees a bottle of wheat based vodka, Till America. I can tell you personally that it was not bad. Till retails for $24.99 a bottle.

MGP’s ingredients division produced $57 million in sales in 2015. The company produces fibers and proteins that go into many of the foods that the American consumer eats. Management is smart in that it is also looking at non-GMO and foods high in protein. These sectors are quite hot with the consumer.

The company invested $20 million to increase production at its Lawrenceburg distillery. Trailing twelve month free cash flow is negative $18.8 million because of this investment. This shift to alcohol helped increase gross margins from 16.6% in the first quarter of 2015, to 22.2% in the first quarter of 2016. In the most recent quarter, gross margin fell to 19.32%.

Management has given guidance of 10% to 15% annual growth in operating income over the next three years and low single digit growth in sales. Management did warn that fiscal  year 2016's profits might not be as high due to volatile conditions in ethanol. I guess whoever panicked and sold shares the other day did not read that memo.

We were fortunate enough to buy shares at $19 last fall and sold the other day at $42. The only reason that we sold is that we felt the stock was getting pricey. It is a buy at this point? Probably so. MGP will continue to spread into the high margin liquor business. There are only a handful of liquor companies in the world: Diageo, Pernod Ricard (PDRDY, Financial), Suntory (private), and Constellation (STZ, Financial). Most of what you see at a bar is owned by these four. So my point is that MGP at a P/E of 22.65 is not badly priced. As a matter of fact, since I began writing this article this morning, the stock is already up half a buck. However, the food and grains businesses are quite volatile and it will not be unusual for MGP to occasionally not meet expectations.

Disclosure: We do not own shares.

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