Lux Row's Calculated Growth And Premiumization Pave The Way For Spirited Revenue Gains

Key Takeaways

• Strategic expansion and premiumization of MGP Ingredients' portfolio indicate a shift towards higher margins and revenue from premium products.
  
• Investments in advertising, operational efficiency, and mergers & acquisitions aim to bolster market share, reduce costs, and diversify the product portfolio.
  
• Strategic focus on premium spirits and new distillate sales could pressure margins and cash flow amid risks from market acceptance and macroeconomic shifts.

Catalysts

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

• MGP Ingredients' recent recommissioning of the Lux Row distillery to expand distilling capacity in Bardstown, Kentucky supports ongoing growth in branded whiskey, indicating future revenue growth from increased production capabilities.
  
• A strategic focus on premiumizing the portfolio, where premium plus portfolio now makes up 48% of Branded Spirits segment sales, suggests higher future margins and revenue from shifting consumer preferences towards premium alcoholic beverages.
  
• Investments in advertising and promotion, particularly around premium plus price brands, indicate a strategic push to capture more market share in higher-margin segments, likely affecting future sales growth and brand visibility in targeted markets.
  
• The initiation of a mini fuel plant to monetize waste starch streams from the Atchison distillery closure demonstrates operational efficiency and cost management, potentially impacting future margins positively by reducing waste-related costs.
  
• The ongoing efforts in M&A and the growth strategy towards becoming a premier branded spirits company are likely to diversify and strengthen MGP Ingredients' product portfolio, impacting long-term revenue and earnings positively through expansion and innovation within the industry.

Assumptions

• Analysts are assuming MGP Ingredients's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.2% today to 22.9% in 3 years time.
• Analysts expect earnings to reach $192.3 million (and earnings per share of $7.3) by about September 2027, up from $96.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2027 earnings, down from 18.7x today. This future PE is lower than the current PE for the US Beverage industry at 22.8x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The closure of the Atchison distillery led to a short-term decrease in sales and incurred additional costs for waste starch stream disposal, which could negatively affect net margins and earnings.
  
• The focus on premium and premium plus branded spirits, while strategically beneficial for margin improvement, carries the risk of market acceptance and competitive pressures potentially impacting revenue growth and profitability.
  
• The reliance on continued momentum in the branded spirits segment for future revenue growth is a concentration risk, which if not met due to changing consumer preferences or increased competition, could adversely affect sales and profits.
  
• Investments in advertising and promotions, as well as capital expenditures for growth initiatives, while necessary for long-term growth, could strain cash flow and impact net income in the short to medium term if sales growth does not meet expectations.
  
• The shift towards new distillate sales with contracted customers, primarily multinational, may expose the company to risks related to changes in macroeconomic conditions or shifts in consumer demand that could impact the Distilling Solutions’ segment sales and margins.

Valuation

• The analysts have a consensus price target of $112.67 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 $135.0, and the most bearish reporting a price target of just $92.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $840.2 million, earnings will come to $192.3 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $81.8, the analyst's price target of $112.67 is 27.4% 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.