American Spirits Will Face Pressure As Sustainability Offers Relief

Key Takeaways

• Premium spirits growth is offset by weakness in value tiers and distilling, with competitive pressures and shifting demand threatening segment revenues and margins.
  
• Ingredient Solutions gains from health trends but faces onboarding and export challenges, while structural risks and market shifts limit long-term growth and profitability.
  
• Prolonged industry headwinds, weak demand, revenue concentration, and execution risks threaten MGP's revenue stability, growth prospects, and margin resilience across core and emerging segments.

Catalysts

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

• Although MGP has benefited from the ongoing premiumization of spirits and the robust growth of its flagship premium plus brands such as Penelope, persistent softness in mid
• and value-tier whiskey and tequila products has led to a greater revenue decline than initially projected, with the risk that continued price competition or shifts in consumer demand could further pressure overall segment revenues in future years.
  
• While demand for natural, specialty wheat proteins and fibers is driving growth in the Ingredient Solutions segment-particularly due to health and wellness trends among consumers-choppy new customer onboarding, export market volatility, and a lengthy commercialization cycle for major new ingredient clients could cause uneven top-line performance and slow the segment's ability to deliver meaningful net margin expansion in the near to medium term.
  
• Even as MGP invests in operational efficiency and capacity expansions to meet anticipated American whiskey demand, ongoing excess industry inventory and major customers pausing their distillate purchases are likely to keep distilling segment gross profits and EBITDA significantly below historical levels for an extended period, risking underutilization of assets and persistent margin drag if industry rationalization slows or demand does not recover as quickly as hoped.
  
• The company's proactive initiatives for supply chain optimization and successful cost management have helped cushion earnings, but larger structural threats-such as continued consumer migration toward no
• and low-alcohol alternatives and increased regulatory scrutiny on alcohol-could result in a long-term ceiling on revenue and future operating earnings as core categories mature or contract.
  
• MGP's alignment with the movement toward greater sustainability and e-commerce channel expansion offers competitive positives for future market share, but persistent risks from customer concentration in distilling, potential commodity cost inflation, and possible distributor consolidation could still erode pricing power and compress net margins, especially if consumer preferences or industry dynamics further shift away from traditional spirits.

MGP Ingredients Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on MGP Ingredients compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming MGP Ingredients's revenue will decrease by 4.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.1% today to 16.1% in 3 years time.
• The bearish analysts expect earnings to reach $86.9 million (and earnings per share of $4.0) by about August 2028, up from $-6.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.0x on those 2028 earnings, up from -88.6x today. This future PE is lower than the current PE for the US Beverage industry at 26.3x.
• Analysts expect the number of shares outstanding to decline by 3.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

MGP Ingredients Future Earnings Per Share Growth

Risks

• The prolonged and significant decline in Distilling Solutions sales-down 50% for the full year and gross profit dollars expected to decline 65%-along with ongoing industry inventory rationalization and customer purchasing pauses, raises the risk of sustained revenue and earnings pressure through at least 2026 as the American whiskey sector works through excess supply.
  
• Persistent weakness in mid
• and value-tier branded spirits, which are expected to be down by double-digits for 2025 due to heightened price competition and softer consumer demand, could continue to drag on overall Branded Spirits segment revenues and margins over the long term even as premium plus brands show growth.
  
• High customer concentration in the distilling segment, along with reliance on large, long-standing contracts with multinational clients who can pause purchases for long periods, exposes MGP to the risk of revenue volatility and operating leverage challenges if customers do not resume volume or choose to insource production.
  
• Ongoing global economic uncertainty, inflation, and multiyear lows in consumer confidence have already resulted in more cautious discretionary spending and softer demand, and these secular trends could reduce both volumes and the company's ability to pass through cost increases, thereby squeezing operating margins and profitability.
  
• Delays in fully commercializing its new biofuel plant and slow ramp-up for new ingredient customers, coupled with previous declines in its specialty protein export business, highlight execution risk and suggest that gains in the Ingredients Solutions segment may not fully offset long-term headwinds in spirits, pressuring top-line growth and net income.

Valuation

• The assumed bearish price target for MGP Ingredients is $30.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of MGP Ingredients's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $30.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $539.3 million, earnings will come to $86.9 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $27.4, the bearish analyst price target of $30.0 is 8.7% 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.