MGP
Ingredients (MGPI, $40.51): “Eat, Drink, and be Healthy”
By:
Patrick Wade, AIM Student at Marquette University
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
• MGP Ingredients, Inc. (NASDAQ:MGPI) has two reportable segments:
distillery products and ingredient solutions. The distillery products segment
is responsible for processing corn and other grains into distillery co-products
and food grade alcohol. The ingredient solutions segment consists producing and
distributing wheat starches and proteins.
• MGP’s Fibersym RW
resistant wheat starch meets the criteria for FDA’s new definition of dietary fiber,
which was in accord with the significant changes to food labels.
• Results of a study
conducted at South Dakota State University showed that Fibersym wheat starch reduces
risk factors associated with metabolic syndrome.
• Despite missing
estimates for the second quarter, MGP initiates a quarterly dividend policy.
• After missing second
quarter estimates, it looks as though MGP has intentions of continued long term
growth.
Key
points: The FDA has changed their definition of dietary
fiber, and MGP’s Fibersym RW resistant wheat starch is included. The FDA is
requiring significant changes to packaged food labels, and the new ruling comes
into effect in July of 2018. Resistant starch is included under the definition
of dietary fiber, and while isolated fiber is going to be required to show at
least one beneficial physiological effect on humans, Fibersym demonstrates
several. The vice president of research and development and chief science
officer at MGP was quoted saying, “Results of several university clinical
studies confirm the many benefits of Fibersym RW and identify the ingredient as
an outstanding dietary fiber source.”
Not only did Fibersym
make the cut as a dietary fiber, but a study conducted at South Dakota State University
shows the Fibersym reduces the risk factors associated with metabolic syndrome,
which approximately effects 34% of Americans. Symptoms of metabolic syndrome
include high blood pressure, abdominal obesity, elevated blood sugar, and a
high chance of developing heart disease and type-2 diabetes. Mike Buttshaw, the
vice president of ingredients sales and marketing was quoted, “This clinical
study proves once again that Fibersym RW-fortified food products are a smart
dietary choice for consumers wanting to live a healthier lifestyle. Its growing
use in a number of bakery, pasta, breakfast cereal, and snack products attest
to its significant impact on American consumers.” Moving forward, we can expect
the ingredient’s solution segment to grow due to the newly discovered health
benefits.
Although earnings were
lower than expected for the second quarter, a quarterly dividend $0.02 per
share was issued, which was paid out on September 8th.
Traditionally, MGP announces a dividend at the end of their fiscal year, but
this was MGP’s way of telling the stockholders that positive cash flow will
continue into the remainder of 2016 and beyond. They believe that putting in
place a quarterly dividend will help deliver value to the shareholders and
fortify their confidence in the company.
What
has the stock done lately?
Before reporting the
second quarter results, MGP hit an all-time high of $44.25 before it plummeted to
$33.99 on August 16, 2016. Since then, it has slightly rebounded to a price of
$40.51 as of September 7th. The strong decline in value was due to a
decrease in net sales, operating income, and net income compared to the second
quarter results of 2015. However, MGP’s YTD operating income is still 21.0%
than the prior year’s numbers, which is an achievement in itself.
Past
Year Performance: Since the initial purchase of MGP
Ingredients on September 18, 2015, we have seen a 153.2% increase in value;
even after missing analyst estimates in the second quarter of this year. In the
past year, we have seen tremendous performance out of MGP, with only a few
speed bumps along the way. Their sales and EPS have been relatively consistent,
but have unfortunately seen little growth since the previous period. However,
we have seen a large amount of capital expenditures in the past year with management
expecting to spend approximately $24M by the end of the year, which should
stimulate growth in coming periods.
My
Takeaway
Although MGP missed
their EPS estimate of $0.40 and actually returned $0.37, I still have confidence
in this company. The missed estimate was partly due to a weakening in their
gross margins from 20.54% to 19.32%, which was due to an increase in cost of
goods sold. If you look at the previous five periods, you will see an overall
increase in the gross margin with some small fluctuations between the periods. Variations
in cost of goods sold from period to period is common with consumer staple
companies, and the gross margin should continue to grow
moving forward. I also believe that the Fibersym RW will be a strong key
driver, and will expand the ingredient solutions segment substantially for the
periods to come. I have conviction in MGP Ingredients, and hopefully we will
see continued strong performance in the future.
