Expanding Penelope And El Mayor Brands Will Strengthen Future Prospects

Key Takeaways

• Strategic expansion in Branded Spirits and Ingredient Solutions segments aims to drive revenue growth and improve sales and margins through marketing and innovation.
  
• Cost-reduction and capital expenditure cuts, amidst changing whiskey demand, enhance flexibility and potential for earnings growth.
  
• High whiskey production and consumption normalization, coupled with tariff uncertainties and financial stress in branded spirits, pose significant challenges to profitability and margins.

Catalysts

Produces and supplies distilled spirits, branded spirits, and food ingredients worldwide.

• MGP Ingredients is focusing on expanding its Branded Spirits segment, which includes popular brands like Penelope and El Mayor, with plans to use strategic marketing and brand alignment to drive long-term revenue growth.
  
• The Ingredient Solutions segment is expected to benefit from trends in functional nutrition, with plans to expand into high-growth categories such as plant-based foods, which could improve both sales and gross margins.
  
• MGP Ingredients is implementing cost-reduction initiatives in the Distilling Solutions division to address declining whiskey demand, which should help stabilize net margins despite challenging market conditions.
  
• Despite elevated current inventories, signs of improving industry supply-demand dynamics in whiskey production suggest a potential for recovering demand, which could positively impact future revenue and earnings.
  
• The company is reducing its capital expenditures significantly, which, combined with a decrease in net whiskey putaway, is expected to enhance free cash flow, providing more flexibility in managing earnings growth.

MGP Ingredients Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MGP Ingredients's revenue will decrease by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $68.1 million (and earnings per share of $3.21) by about March 2028, up from $34.3 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 14.4x on those 2028 earnings, down from 19.6x today. This future PE is lower than the current PE for the US Beverage industry at 28.1x.
• Analysts expect the number of shares outstanding to decline by 3.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

MGP Ingredients Future Earnings Per Share Growth

Risks

• A faster-than-expected decline in the brown goods business due to elevated industry-wide barrel whiskey inventories presents a significant challenge, likely impacting net revenue and earnings.
  
• The anticipated continued pressure on Distilling Solutions sales and gross profit due to high whiskey production and consumption normalization from post-COVID levels could negatively affect total revenue and earnings.
  
• The potential resumption of tariffs, particularly impacting tequila brands imported from Mexico, introduces uncertainties that may affect the company's net margins and profits.
  
• The noncash adjustment to goodwill in the Branded Spirits segment, due to unfavorable macroeconomic factors such as high discount rates and lower peer valuation multiples, indicates potential financial stress that could hinder future earnings growth.
  
• The reduction in segment gross profit estimates for Distilling Solutions by 65% compared to previous estimates reflects significant pressure on margins, which may lead to lower overall profitability.

Valuation

• The analysts have a consensus price target of $43.0 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 $53.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $558.5 million, earnings will come to $68.1 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 6.4%.
• Given the current share price of $31.57, the analyst price target of $43.0 is 26.6% higher.
• 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.