Food and beverage supplier MGP Ingredients (NASDAQGS:MGPI) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 15.1% year on year to $170.6 million. On the other hand, the company's full-year revenue guidance of $749 million at the midpoint came in slightly below analysts' estimates. It made a non-GAAP profit of $1.07 per share, down from its profit of $1.39 per share in the same quarter last year.
MGP Ingredients (MGPI) Q1 CY2024 Highlights:
- Revenue: $170.6 million vs analyst estimates of $170.3 million (small beat)
- EPS (non-GAAP): $1.07 vs analyst estimates of $0.99 (8.3% beat)
- The company reconfirmed its revenue guidance for the full year of $749 million at the midpoint (below)
- The company reconfirmed its EPS (non-GAAP) guidance for the full year of $6.18 million at the midpoint (in line)
- Gross Margin (GAAP): 36.8%, up from 34.7% in the same quarter last year
- Free Cash Flow was -$2.40 million, down from $21.97 million in the previous quarter
- Market Capitalization: $1.72 billion
Headquartered in Atchison, Kansas, MGP Ingredients (NASDAQGS:MGPI) is a leading supplier of high-quality ingredients to the food and beverage industry
Since its founding in 1941, MGP Ingredients’s bread and butter has been in the production of premium distilled spirits, including whiskey, bourbon, gin, and vodka. In addition to producing bulk spirits, the company has a portfolio of award-winning premium beverage brands such as Eight & Sand Blended Bourbon and George Remus Bourbon.
Given its expertise in the grain industry, MGP Ingredients is also a producer of specialty wheat proteins and starches. Its ingredients have critical applications in various industries like food and beverage, pet food, personal care, and pharmaceuticals.
The company sells its products to a global base of customers, placing a strong emphasis on understanding and meeting their unique needs. Its close collaboration with clients to develop tailored solutions builds trust and ensures a seamless sales process.
MGP Ingredients is also deeply committed to innovation and continuously improving its production process. The company invests in industrial technology and has rigorous quality assurance protocols to ensure that all products meet or exceed industry standards.
Beverages and Alcohol
These companies' performance is influenced by brand strength, marketing strategies, and shifts in consumer preferences. Changing consumption patterns are particularly relevant and can be seen in the explosion of alcoholic craft beer drinks or the steady decline of non-alcoholic sugary sodas. Companies that spend on innovation to meet consumers where they are with regards to trends can reap huge demand benefits while those who ignore trends can see stagnant volumes. Finally, with the advent of the social media, the cost of starting a brand from scratch is much lower, meaning that new entrants can chip away at the market shares of established players.
Competitors selling distilled spirits include Brown-Forman (NYSE:BF.B) and Diageo (NYSE:DEO) while those selling specialty ingredients include Ingredion (NYSE:INGR) and private company Cargill.Sales Growth
MGP Ingredients is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale. On the other hand, one advantage is that its growth rates can be higher because it's growing off a small base.
As you can see below, the company's annualized revenue growth rate of 25.8% over the last three years was exceptional for a consumer staples business.
This quarter, MGP Ingredients reported a rather uninspiring 15.1% year-on-year revenue decline to $170.6 million in revenue, in line with Wall Street's estimates. Looking ahead, Wall Street expects revenue to decline 5% over the next 12 months.
Gross Margin & Pricing Power
We prefer higher gross margins because they make it easier to generate more operating profits.
MGP Ingredients's gross profit margin came in at 36.8% this quarter, up 2.1 percentage points year on year. That means for every $1 in revenue, $0.63 went towards paying for raw materials, production of goods, and distribution expenses.
MGP Ingredients's unit economics are higher than the typical consumer staples company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see above, it's averaged a decent 34.4% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 16% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).
Operating Margin
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
This quarter, MGP Ingredients generated an operating profit margin of 17%, down 3.7 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by operational inefficiencies and a step up in discretionary spending in areas like corporate overhead and advertising.
Zooming out, MGP Ingredients has been a well-managed company over the last eight quarters. It's demonstrated it can be one of the more profitable businesses in the consumer staples sector, boasting an average operating margin of 17.3%. On top of that, its margin has remained more or less the same, highlighting the consistency of its business. EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q1, MGP Ingredients reported EPS at $1.07, down from $1.39 in the same quarter a year ago. This print beat Wall Street's estimates by 8.3%.
Between FY2021 and FY2024, MGP Ingredients's EPS grew 91.1%, translating into an astounding 24.1% compounded annual growth rate. If it can maintain this rate of growth, MGP Ingredients will more than double its EPS in the next five years.
Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 17% year-on-year increase in EPS.
Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
MGP Ingredients burned through $2.40 million of cash in Q1, representing a negative 1.4% free cash flow margin. The company increased its cash burn by 78.6% year on year.
Over the last eight quarters, MGP Ingredients has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 3.6%, subpar for a consumer staples business. However, its margin has averaged year-on-year increases of 2 percentage points over the last 12 months. Continued momentum should improve its cash flow prospects.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
MGP Ingredients's five-year average ROIC was 13.4%, slightly better than the broader sector. Just as you’d like your investment dollars to generate returns, MGP Ingredients's invested capital has produced decent profits.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, MGP Ingredients's ROIC averaged 5.2 percentage point decreases over the last few years. We like what management has done historically but are concerned its ROIC is declining, perhaps a symptom of waning business opportunities to invest profitably.
Balance Sheet Risk
As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.
MGP Ingredients reported $19.5 million of cash and $300.8 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.
With $195.6 million of EBITDA over the last 12 months, we view MGP Ingredients's 1.4x net-debt-to-EBITDA ratio as safe. We also see its $7.67 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.
Key Takeaways from MGP Ingredients's Q1 Results
It was good to see MGP Ingredients beat analysts' EPS expectations this quarter and maintain full year EPS guidance, which is in line with expectations. The stock is up 4.6% after reporting and currently trades at $81.99 per share.
Is Now The Time?
When considering an investment in MGP Ingredients, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
MGP Ingredients isn't a bad business, but it probably wouldn't be one of our picks. Although its revenue growth has been exceptional over the last three years, its brand caters to a niche market. And while its EPS growth over the last three years has been fantastic, the downside is its low free cash flow margins give it little breathing room.
MGP Ingredients's price-to-earnings ratio based on the next 12 months is 12.1x. In the end, beauty is in the eye of the beholder. While MGP Ingredients wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price right now.
Wall Street analysts covering the company had a one-year price target of $114.14 per share right before these results (compared to the current share price of $81.99).
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