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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (247)  | Author's Website |

MGP Ingredients Declines With Falling Revenues

The stock has been headed straight down for several weeks after management announced lower sales and earnings for 2019

February 06, 2020 | About:

MGP Ingredients Inc. (NASDAQ:MGPI) has been headed straight downwards for several weeks after management announced lower sales and earnings for full year 2019.

Though the stock continues to fall, it could be a buy once it settles. The challenge is knowing what liquor contracts the distiller has lost or gained.

As of Feb. 5, the stock trades at $34.55 for a market cap of $578 million. Earnings per share are $2.20 and the stock trades at a price-earnings ratio of 15.8 - pretty cheap on that metric. The S&P 500 trades in the mid-20s on a price-earnings basis. The dividend yield is 1.17%.

From the company's website:

"Sales grew from $318 million in 2016 to $375 million for the trailing twelve months. Earnings grew from $30 million to $37 million over that time frame. Profit margins are 10% and return on equity is 18%. Free cash flow was about $20 million last year but closer to $2 million for the last few years."

The company has been expanding its liquor distilleries recently. The balance sheet shows about $4 million in cash and $40 million in receivables. The liability side shows $24 million in payables and $40 million in debt. That’s a pretty solid balance sheet.

MGP’s stock fell 15% back in January due to a big miss in revenues and earnings. The company guided for sales of $362 million vs. consensus estimates of $391 million. EPS of $2.20 to $2.32 are anticipated instead of the $2.58 that analysts predict and the $2.55 to $2.75 from prior expectations. According to the company's EPS guidance, the forward price-earnings ratio is 15.5.

The company wasn’t able to sell its aged whiskey as planned. The third quarter last year was tough too. Sales fell 4.6% to $90.7 million. Brown goods (whiskey and rye) fell $5.5 million, but white goods (gin) rose $632,000. Product ingredients account for about 16% of sales.

Headquartered in Atchison, Kansas with its distillery located in Lawrenceburg, Indiana, MGP “white-labels” for other distillers. Much of the rye that you see in liquor stores is really produced by MGP. Just turn over the label and read where it’s distilled. If it says Lawrenceburg, Indiana, it’s MGP Ingredients. The company also has its own brands such as Tillman, Tanner’s Creek and George Remus.

MGP has run into some environmental problems over the last few years. One is Baudoinia compniacensis, a black mold that is appearing around town in Lawrenceburg. Of course, the company said the mold isn’t coming from its plant, but other groups claim it is. Who knows? The second issue that the company has faced is its release of chlorine gas in Atchison, Kansas. The company had to pay $1 million fine and an administrative civil penalty of $251,000.

We purchased the stock four year ago and more than doubled our money. The stock continued to run to $95 in 2018 before its decline. What’s funny is that I kicked myself for selling too soon, but now it’s below where I originally sold in the $40s. I looked at SEC filings and the insiders don’t seem to be selling.

My opinion is that MGP could be losing some key contracts. With all of the attention to liquor in this country, competition has increased. Management does not like to let investors know whom they produce for, so it’s difficult to know when they gain and lose contracts.

The stock is headed straight down, so I wouldn’t buy right now. Having stated this opinion, it’s still a liquor company and trades very cheaply. By contrast, Diageo (DEO) trades at a price-earnings of 24. MGP Ingredients could very well be a buy once the earnings and stock stop falling.

Disclosure: We do not own stock in the companies mentioned.

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

Visit Holmes Osborne, CFA's Website


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