Thursday, December 24, 2015

10th AIM Student Equity Update (by Mark Lakowske): MGP Ingredients: The Leader of the New Whiskey Rebellion!

MGPI (MGP Ingredients): Riding High on the Whiskey Revolution
By: Mark Lakowske, student at Marquette University

Image result for MGP Ingredients  logo 

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

MGPI produces and sells distillery and ingredients products to the packaged goods industry in the United States. 

Demand for MGP's products has been on the rise for the past few years. The firm produces and sells distillery and ingredients products to the packaged goods industry in the United States, Japan, and Canada. Its Distillery Products segment primarily offers food grade alcohol, fuel grade alcohol, distillers feed, and corn oil. 

• The management team has realized issues that have impacted past performance and are positioned to improve and capture financial benefits  over the next few years.

Cash flows, net income, and margins have all improved dramatically since the end of 2014. In turn, the past few quarterly earnings results have been outstanding and better than anticipated by analysts.

The stock has been on a tear since the beginning of 2015—increasing 44% during this volatile year!

MGP Ingredients, Inc. (MGPI) still has much growth potential for the future. When Gus Griffin took over as President and CEO, he established a five year plan to focus on maximizing the value of production, capture a large share of the value chain in both business segments, invest for growth, continue risk management, and build the MGP brand. This well thought out strategy got investors excited and institutions and other funds have been pouring cash into the company.

The past three quarters have seen tremendous financial growth for the company. The corporate restructuring has allowed the company to capture profits from the growing whiskey demand across the United States. Since Gus Griffin took the reins in July 2014, quarterly sales have grown at an average rate of 3.78% YoY.  More impressively, company margins have skyrocketed this year—increasing from the mid-single digits in 2014 to the upper teens and low twenties in 2015.

The overall demand for liquors has been roaring in the past few years. Whiskey demand spiked 40% in over the past decade. MGP is adjusting for high demand by expanding its operation. The company just announced that they are dumping $16.4 million into warehouse expansion that will enable them to essentially double their barrel capacity. Griffin is confident that “American whiskey is in the early stages of a long term growth trend” and “Thanks to our strong reputation for quality and innovation, MGP is uniquely positioned to benefit from this trend.”

What has the stock done lately?
Since management released plans for their five year growth plan at the end of 2014, the stock has ripped up 44%. Since the beginning of 2015 Q2 when the company began showing signs of financial stability and growth, the stock has shot up over 80%. From a technical standpoint, the stock broke away from their 50 and 200 day moving averages in the beginning of October at their inflection point.

Past Year Performance: MGP Ingredients sales are up 3.7% from Q3 2014 and 6% from Q2 2014. Return on equity has improved dramatically from 2014 where ROE was negative in March to returning 25.68 in Q3 2015. The company still maintains a healthy leverage ratio from 2014—debt only making up 19% of the capital structure.




Source: FactSet

My Takeaway

The new management team, with a strong focus on the future, is the main driver for future growth in the company. Focusing on streamlining the operation as a whole has allowed the company to reap benefits from growing distilled spirits demand especially in the whiskey department. My positive company outlook is reassured by the largest shareholders. Over the past six months, the top fifteen institutional holders have collectively purchased 2 million more shares of MGPI. Cheers to MGP Ingredients! 

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