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MGP INGREDIENTS INC MGPI
August 17, 2016 - 12:46pm EST by
hbomb5
2016 2017
Price: 34.39 EPS 1.52 1.84
Shares Out. (in M): 17 P/E 22 18.6
Market Cap (in $M): 573 P/FCF NA NA
Net Debt (in $M): 41 EBIT 42 49
TEV (in $M): 614 TEV/EBIT 14.6 12.5

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Description

MGP Ingredients

Investment Merits:

We believe that the current market price of MGPI offers an attractive entry-point to the patient investor with a multi-year time horizon. Factors include:

  • Favorable macro trends in the alcoholic beverage industry where MGP is ideally set up to have an advantage.

  • A proven management team under the guidance of a strong and experienced board has already created value by significantly improving margin years ahead of the original plan.

  • A strong balance sheet with low leverage that will help as management transforms the business from commodity-like to high returns on capital business.

Background:

Despite the name, MGP Ingredients is a leading supplier of premium American whiskeys, distilled gin, and vodkas; specialty wheat proteins and starches; industrial alcohols found in cosmetics, vinegar, and sanitizers; as well as fuel.  The company manufactures its products from two facilities – Lawrenceburg, Indiana and Atchison, Kansas.  It holds a 30% non-operational ownership in Illinois Corn Products (ICP JV) which produces low margin commodity alcohol products that go in food and fuel applications.

Favorable Macro Trends:

MGP derives 83.4% of its revenues from the distilled products segment (alcohol beverages and industrial alcohols) and the rest from its ingredient solutions segment (food additives).  Given below are some favorable macro trends working in MGP’s favor:

  • Although whiskey consumption was over 100MM cases in 1970, it dropped over 50% by 2000, despite a US population growth of around 50% (Figure 1).  Since 2009, however, whiskey has since regained some of its lost shares from other alcohol beverages (Figure 2).   MGP’s Lawrenceburg is the largest independent distiller in the US, and production of whiskey dominates in this location.    

  • Specifically, within the distilled spirits category, bourbon whiskey is growing at a higher rate –squarely in MGP’s territory.  The chart in Figure 3 shows its growth since 2002.

  • About 70% of rye-based whiskey is produced in US is from the Lawrenceburg facility.  Since 2009, this category has recorded a 41% annual growth (Figure 4).

  • Grain neutral spirits (vodka, gin) are growing at a lower rate. Both facilities of the company participate here, representing around 35% of the overall US market share for gin and 25% for vodka (Figure 5).

  • MGP’s legacy ‘Ingredient solutions’ segment participates in the following trends: non-GMO, high dietary fiber, protein, and plant-based proteins.  Ingredient solution is a low margin business, and it contributes about 18% of the company’s revenues and an even lesser amount to its bottom line.

 

Figure 1:  US Consumption Whiskey vs Non-Whiskey (1970-2000) Source: DISCUS.org

 

Figure 2:  Whiskey (12-bottle) Case Growth Since 2009, Source: DISCUS.org

 

Figure 3: American Whiskey Demand, Source: DISCUS.org

Figure 4: Rye Whiskey, CAGR - 41%, Data from DISCUS.org

 

MGP is a major player in Vodka/Gin (White goods). It maintains a significant market share as seen in the company’s presentation below: