November 30, 2009 - 7:14pm EST by
2009 2010
Price: 6.63 EPS .50 (2009/2010) .75 (2010/2011)
Shares Out. (in M): 17 P/E 132.0x 8.8x
Market Cap (in $M): 110 P/FCF 12.7x 8.5x
Net Debt (in $M): 15 EBIT 14 21
TEV (in $M): 125 TEV/EBIT 8.9x 5.9x

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          Corporate transformations are almost always difficult and time consuming. MGP Ingredients-MGPI (6.63)- having suffered thru the pangs of change  leaving behind its caterpillar housing and appears to be emerging as an exciting and attractive butterfly.


          MGP is an old line company, a manufacturer of distillery products  for the liquor industry since the forties  as well as specialty wheat grade ingredients for the food industry. Along the way, the allure of ethanol took over, at first helping then ultimately hurting- almost bringing the company to its knees.


           A revitalized management team entered this year, writing off and shutting down the commodity ethanol area to focus on what the company calls "science over steel" as its future. The changeover was rough, with more than a 50% reduction in employees, the sale of a plant,  and the discontinuance of commodity based areas of fuel alcohol, wheat proteins, and starches (commodity parts only). Losses of $69 million on sales of $275 million were reported in fiscal 2009!


           Significant change brought with it a violation of bank covenants in March 2009.  Finally resolved in July, MGP entered into a new bank agreement with Wells Fargo for their financial needs and reduced their revolver from over $54 million in Oct 2008 to a year-end level of under $18 million. Aiding in this was a significant reduction in SG & A expenses, down in the fourth quarter of fiscal 2009, some 33% year over year.


           That is in the past. MGP now sees itself as a producer of value-added product solutions of specialty wheat proteins and wheat starches, and high quality beverage and food grade alcohol. A major product is dietary fiber which finds its way into bread, pizza, cakes ,cookies, etc. Dietary fiber is composed of 85% fiber,  produces a low glycemic impact, reduces caloric intake and provides better process stability. Other starches are used for thickening, adhesion and tolerance to high temperatures which find their way into soups, sauces, dressings as well as fruits, nuts and chocolate products. Wheat protein isolates increase the firmness of pasta and noodles, help create a softer, more palatable bakery product and extend the shelf life of flour tortillas and meat analogs. Textured proteins with meat replacement at levels as high as 40% will not change the manufacture's formulation or distort the nutritional value in a wide range of poultry (breaded patties, nuggets, deli rolls and shredded products), pork, beef and seafood.


           MGP Ingredients seeks to become the "first call" in dietary fiber; protein isolates and textured proteins and seek to ride the health food wave growing in the US. Low glcycemic and low calorie foods many made up of  MGP's ingredients featuring dietary fiber,  seem to play an important role in diabetes, cancer, heart attacks and weight control. And with two- thirds of Americans overweight, major food manufactures are looking aggressively to expand their products for this market.


            The other half of the company- the food grade alcohol area- has seen MGPI as one of the three leading suppliers in the US, delivering product for over sixty years. The company estimates that it has a US market share of  approximately 20%. Food grade industrial alcohol finds its way into flavorings, extracts, food, dyes, vinegar, drugs, household and personal care products.


           The swine flu is kicking up sales of hand sanitizers, a product that seems almost ubiquitous today. The company has said that its industrial alcohol division is busy filling orders for growing demand.


           In addition, MGP is in the beverage alcohol business, supplying, some of the finest gin and vodka producers in the US. While the brown whisky market, scotch, bourbon has been  slow growing at 1%, the white goods market has seen recent growth of 5-8%. The company is one of only three in the US that manufactures natural grain alcohol and finds its way into some of the liquor industry's premium products.


          Last week, MGPI announced a joint venture with SEACOR Energy (SRI) on the NYSE to produce 90 million gallons of alcohol, the fuel part marketed by SRI and the other half by MGP starting at the turn of the year. The available capacity of food grade and beverage alcohol is now about 50% higher on an annualized basis than the current fiscal year's first quarter. The company said that this deal allows it to take advantage of significantly increased demand for alcohol for use in sanitizing products as the result of the H1N1 concerns.


        SEACOR paid $15 million for a 50% interest in the joint venture and will provide any additional financing as needed. Upon completion  of the deal, total MGPI  net debt will be $15 million down $60 million from the same time last year.


        MGPI is very excited about its potential in the health and wellness trends, with many companies using and testing products from their key food technology platforms of resistant starches, specialty proteins and textured proteins. They were very encouraged by recent clinical studies conducted by or in conjunction with various major universities that indicated that Fibersym RW can improve digestive health, help manage blood glucose levels and type 2 diabeties, and may have potential to help protect against colon cancer.


        After spending the past fiscal year restructuring to a focused, value added food and liquor alcohol company, MGP recently reported first quarter earnings of  $0.22 untaxed compared to a loss, on sales of $47 million versus $99 million. This is the first clean first quarter of the "new" MGPI with $3.8 million income before taxes. If we pro forma at a 35% tax rate, we are left with earnings of  $0.15 for the first quarter. Management on the conference call mentioned that they saw no important seasonality and had a 15% gross margin goal. EBITDA was $6.9 million for quarter. We are tentatively going with a $200 million revenue estimate for the 2009-10 year and earnings of $0.50. The 2010/11 year, with the addition of the joint venture and new food products  sales suggest $240 million and a $0.75 estimate.




1.Just starting to report strong earnings growth

2.Discover that company is out of the ethanol biz

3.Swine flu and health food winner

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