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Alexander Valtsev

MGP Ingredients: A Real Gem

Today I would like to talk about a stock that I found about six months ago and has advanced greatly since then. I really wish I picked up more shares of it. I am talking about MGP Ingredients (MGPI), a century-old distillery located in Kansas with a significant track record on the stock market. I analyzed the company back in May. I estimated the stock's fair value to be in the range between $18-$20 in my DCF model. The stock is worth almost $22 per share as per the Friday's closing price:

(Source: Bloomberg)

Note: the stock's returns are compared the price dynamics of the S&P500 Index over the last 52 weeks.

As evident from the above, the shares of MGP Ingredients have returned about 40% over the past year. This is so when we factor in the dividends (the current annual yield is about 0.3%):

(Source: November 2015 Presentation)

So, we see that the stock can produce returns. Our question is: what is going to drive the returns in the future? In my article in May, I cited the following growth factors for the company and its shares: 

- A world-class sales team run by Gus Griffin of Brown-Forman Corporation. He worked in Brown-Forman for 24 years and spent the last three years in the company working as SVP and Global Managing Director of the company's Jack Daniel's business. The Jack Daniel business is Brown-Forman's flagship brand with a 23-year sales CAGR of over 10%. This is very impressive! Gus Griffin is currently CEO of MGP Ingredients.

- The Five-Year Strategic Plan. Essentially, the company plans to accomplish three key things: (1) quadruple its operating income ($7.8M in 2014), (2) build its own aged whiskey inventory and (3) maximize production volumes of American whiskey, which "has been expanding at more than 4.5% compound annual rate over the past five years". The good news is that: (1) the YTD operating income is already over $22M, according to the latest quarterly report and (2) $16M has been invested in the expansion of the existing barrel warehouse capacity.

- A discounted valuation: the stock had a P/E ratio of only 11.0x as of the writing of that article. It currently stands at about 14.0x LTM EPS. This is still a big discount to other, bigger players (Diageo Plc has a multiple of 19.0x, while Brown-Forman trades on a multiple of over 30.0x, according to Google Finance). I think that a further multiple expansion is plausible, if the company delivers on its strategic and operating promises.

Because I have been monitoring the company since my initial analysis, I found new material information about it in a very interesting article here. According to the information in the article, "MGP produces 8% of US whiskey, 70% or rye, and 65% of gin". I could never guess the company was such a large player in these markets. On top of that, the company has launched its own brand named Metze's Select:

(Source: November 2015 Presentation)

I think that the company's almost monopolistic position in its niche markets gives it a very competitive edge and will definitely contribute to the execution of the five-year plan. Readers are welcome to study the company's latest financials here.

In my opinion, the company is a good bet under the current leadership. Its current balance sheet is very robust - only about 45% of assets is financed by liabilities, and the current ratio is well above 2x. In addition, the company has increased its cash flow from operations by about 50% to over $12M, despite a large ~$18M investment in inventory. Finally, it has bought back  over $15M worth of shares from the open market, effectively retiring almost 10% of total shares outstanding.

Also keep in mind that the founding family still owns over 2/3 of the company's equity. This means that investors' interests are very well aligned with the company's management. This is very important for the long-term investor!

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