Expanding Internationally Amidst Whiskey Decline Could Boost Revenue But Squeeze Margins

Key Takeaways

• Shifting towards premium plus spirits and focusing on multiyear contracts aim to stabilize pricing, enhance margins, and drive long-term profitability.
  
• Expansion into European and Asian markets leverages American whiskey’s potential, increasing export sales and potentially boosting revenue.
  
• The company's financial performance is pressured by declining whiskey demand, inventory challenges, and weak segment sales, impacting revenues, margins, and profitability.

Catalysts

Engages in the production and supply of distilled spirits, branded spirits, and food ingredients in the United States and internationally.

• MGP Ingredients is actively reducing its whiskey production and aging whiskey put-aways to align better with lower category demand, which may initially pressure margins but can lead to optimized production costs and improved profitability in the long term.
  
• The company's strategy to expand into international markets, particularly in Europe and Asia, leverages the strong growth potential of the American whiskey category outside the United States, potentially increasing export sales and boosting revenue.
  
• MGP Ingredients is focusing on multiyear contracts for new distillate to stabilize pricing and sales volumes, helping to optimize brown goods profits and improve long-term revenue visibility.
  
• The shift towards a premium plus price tier in the Branded Spirits segment is expected to enhance the margin profile by aligning with consumer preferences, leading to future margin expansion and profitability.
  
• MGP Ingredients' progress in becoming a premier branded spirits company, particularly with the growth of the premium plus portfolio, is anticipated to be a significant growth engine, driving top-line growth and potentially leading to higher earnings.

MGP Ingredients Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MGP Ingredients's revenue will decrease by -5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.4% today to 16.2% in 3 years time.
• Analysts expect earnings to reach $101.3 million (and earnings per share of $4.64) by about November 2027, down from $106.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.7x on those 2027 earnings, up from 10.4x today. This future PE is lower than the current PE for the US Beverage industry at 25.7x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

MGP Ingredients Future Earnings Per Share Growth

Risks

• The company's Distilling Solutions segment is under pressure due to a faster-than-expected deterioration in the American whiskey market, leading to lower demand, lower prices, and reduced visibility on contract distilling sales, which can impact future revenues and profitability.
  
• The company experienced a 24% decline in consolidated sales year-over-year, citing weak performance in brown goods and export headwinds in the Ingredient Solutions business, indicating potential risks to its revenue stream.
  
• Softening whiskey consumption and elevated industry-wide inventories may continue to pressure the company’s sales and margins by reducing spot sales opportunities and increasing pricing pressure on new distillate contracts.
  
• The company is facing challenges in managing distributor inventory levels for its branded spirits, which could further pressure sales and profit margins due to distributor tightening and the added cost of higher-priced, premium brands on their balance sheets.
  
• While the company plans to reduce capital expenditures and operational costs, the fixed cost structures related to reduced whiskey production could become a margin headwind, affecting the company's operating leverage and profitability.

Valuation

• The analysts have a consensus price target of $63.83 for MGP Ingredients based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $50.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $626.9 million, earnings will come to $101.3 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $50.54, the analyst's price target of $63.83 is 20.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.