Grain distributor and liquor distiller MGP Ingredients Inc. (MGPI, Financial) had a disappointing first quarter, missing sales by $2.15 million. The markets responded by driving the stock down from $87 on Tuesday to $65 today.
On May 1, the company reported the distillery division grew sales by 0.3% to $74.6 million in the first quarter. Of that, there was an 8.3% increase in sales of what it calls “white goods,” which is beverage alcohol. Industrial alcohol grew 5.7%. The ingredients division grew sales by 6.9% to $14.5 million. The gross margin rate declined 280 basis points to 18.7%, and operating margins rate fell 220 basis points to 9.6%. It is clear why the stock got hammered.
2019 projections include mid-single-digit sales growth, operating income growth in the range of 15% to 20% (which is lower than recent past years) and earnings per share in the range of $2.55 to $2.65. Based upon $2.55 earnings per share, the stock would trade at $25.7 -- not a bad valuation for a growth company in today’s high-priced markets.
CEO Gus Griffin said in the earnings release:
“The softness in premium beverage alcohol sales was driven by declines in our brown goods. New distillate and aged whiskey declined at similar rates. Sales of new distillate for the quarter were soft due to order timing with multinational and national brand owner customers. Aged sales reflect lower volumes but higher pricing as we transition from selling lighter aged whiskey inventory to older whiskey inventory.
We expect both parts of our brown goods business to return to growth over the remainder of the year as a result of stronger demand and continued strong pricing. Both premium beverage white goods and industrial alcohol saw slightly-improved pricing, but not enough to cover increased corn costs, as oversupply in the market kept us from being able to fully pass through changes in input costs. We expect this situation to continue for the foreseeable future.”
According to Bulleit Rye Whiskey's website, MGP “white labels” liquor for other companies. When you see a George Dickel Rye, which is owned by liquor giant Diageo (DEO, Financial), it’s actually distilled by MGP. This is why we originally bought the stock four years ago when I wrote my first article on Seeking Alpha. At the time, the stock was $19. Since then, the stock has gotten to $95.
I have a few thoughts MGP (which stands for Midwest Grain Products). The first is that I will take management’s word and that things will get back on track. The second is my fear that the company could be losing out to new distilleries being built. An article from Forbes notes that 90% of rye is sourced from MGP or Canadian Alberta Distillers. The author of the article interviews management of Bulleit Rye, also owned by Diageo, if the company will continue to source from MGP. Management’s answer was “yes,” but it makes me think that any newcomers could really put a dent in the company's sales.
In the Forbes article, the author asks another good question. He wanted to know how Bulleit differentiated itself if most rye comes from MGP’s distillery in Lawrenceburg, Indiana. Diageo responded by saying it has a distilling process catered to them and that it uses Bulleit’s barrels to age the rye. A bottle of 12-year Bulleit Rye is $50. Yikes! Not cheap!
However, MGPÂ has hired several new master distillers and has picked up some new contracts. It added Rossville Rye last year. In the article, Griffin said, “Because of the size and scope of our business, we need a very deep and broad pool of talent to operate successfully.” That makes me think the company is going to keep chugging along.
I have mixed emotions on MGP. The first is it will probably keep growing. The second is that the stock is pretty expensive, even after having $22 lopped off. As always, I follow MGP Ingredients and may buy shares if the stock gets cheaper.
Disclosure: We do not own shares.
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