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MGP Ingredients : Predicting The Unpredictable

MGP Ingredients, Inc. (NASDAQ:MGPI) appears to be in growth mode, recently making several announcements that impact its future operations. It was announced on February 11, 2020, that current CEO Gus Griffin would execute a planned retirement on May 21, 2020. He will be replaced by David Colo, who is an MGP Board member and a current director of the company. Under Griffin’s leadership, the Company developed and successfully implemented a new long-term strategic plan that produced significant improvements in the Company’s financial results while also establishing a strong foundation for future growth.

MGP Ingredients, Inc. is expanding its credit availability too. It recently entered into a five-year $300 million revolving credit facility with a syndicate of lenders led by Wells Fargo Bank, N.A. This increases its credit availability by $150 million and could help the company execute the long-term strategic growth referenced above.

It’s worth noting that it hasn’t been all smooth sailing for the company. It was disclosed on January 17, 2020, that performance for the year ending December 31, 2019, would fall short of earlier guidance. Griffin attributed this to being unsuccessful in transacting a large portion of the aged whiskey sales that had been forecast. It will be important to monitor financial performance to determine if the company is trying to execute its growth strategy too quickly.

While current news stories, good or bad, can sway our opinion about investing in a company, it’s good to analyze the fundamentals of the company and to see where it’s been in the past and in which direction it’s heading.

This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if MGPI is currently trading at a bargain price. I provide various situations which help estimate the company’s future returns. In closing, I will tell you my personal opinion about whether I’m interested in taking a position in this company and why.

Snapshot of the Company

A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. It shows a score of around 80/100. Therefore, MGP Ingredients, Inc. is considered to be a good company to invest in, since 70 is the lowest good company score. MGPI has high scores for 10 Year Price Per Share, ROE, Earnings per share, Ability to Recover from a Market Crash or Downturn, and ROIC. It has a mediocre score for Gross Margin Percent. It has a low score for PEG Ratio. A low PEG Ratio score indicates that the company may not be experiencing high growth consistently over the past 5 years. In summary, these findings show us that MGPI seems to have above-average fundamentals since the majority of categories produce good scores.

Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.

(Source: BTMA Stock Analyzer )

Fundamentals

Let’s examine the price per share history first. In the chart below, we can see that price per share has been mostly consistent at increasing over the last 10 years, with the exception of the past 2 years where share price has declined. Overall, share price average has grown by about 482.3% over the past 10 years or a Compound Annual Growth Rate of 21.62%. This is a significant return and a tremendous growth rate.

(Source: BTMA Stock Analyzer – Price Per Share History)

Earnings

Looking closer at earnings history, we see that earnings haven’t grown consistently over the past 10 years. The earnings fluctuated up and down, often going from negative to positive and back again, over the first five years. Then, EPS began to grow consistently from 2014 to 2018. This earnings chart hints to me that the business had some growing pains early on, but the latter years of the chart are showing signs that the company is becoming more efficient with its business model.

We still need to keep in mind that 10-year earnings have not been consistent, and inconsistent earnings make it more difficult to accurately estimate the future growth and value of the company. So, in this regard, MGPI is not an ideal candidate of a stock to accurately estimate future growth or current value.

(Source: BTMA Stock Analyzer – EPS History)

Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.

Return on Equity

The return on equity has been at a good level in the first four years of the chart. However, in the last year, ROE has dropped significantly. This is something to keep an eye on and to be cautious about. Overall, five-year average ROE is good at around 23%. For return on equity (ROE), I look for a 5-year average of 16% or more. So, MGPI easily meets my requirements.

(Source: BTMA Stock Analyzer – ROE History)

Let’s compare the ROE of this company to its industry. The average ROE of 17 Food Wholesaler companies is 15.51%.

Therefore, MGP Ingredients, Inc.‘s 5-year average of 23.4% and current ROE of 19.76% are above average.

Return on Invested Capital

The return on invested capital has primarily decreased over the past five years, with the exception of 2017. As with ROE, it’s concerning that the last year of the chart shows a significant drop in ROIC. Five-year average ROIC is good at around 20%. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So, MGPI passes this test as well.

(Source: BTMA Stock Analyzer – Return on Invested Capital History)

Gross Margin Percent

The gross margin percent (GMP) has been fairly stable and increasing over the last five years. Five-year GMP is low at around 18%. I typically look for companies with gross margin percent consistently above 30%. So, MGPI has not proven that it has the ability to maintain acceptable margins over a long period, as it has not been above 30% over the past five years.

Additionally, MGPI’s gross margin percent is ranked lower than 60% of the 1,596 companies in its industry (Consumer Packaged Goods industry). The industry median is around 26% vs. MGPI’s 22%.

(Source: BTMA Stock Analyzer – Gross Margin Percent History)

Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a good indicator, telling us that the company owns more than it owes.

MGPI’s Current Ratio of 5 is good, indicating that it has a good ability to use its assets to pay its short-term debt. Ideally, we’d want to see a Current Ratio of more than 1, so MGPI greatly exceeds this amount.

According to the balance sheet, the company seems to be in good financial health. In the long term, the company is doing well in regards to its debt-to-equity. In the short term, the company’s financial situation is excellent.

The Price-Earnings Ratio of 15.6 indicates that MGPI might be selling at a low price when comparing MGPI’s PE Ratio to a long-term market average PE Ratio of 15. The 10-year and 5-year average PE Ratio of MGPI has typically been between 24.8 and 24, so this indicates that MGPI could be currently trading at a low price when comparing to MGPI’s average historical PE Ratio range.

MGPI currently pays a dividend of 1.17% (or 1.17% over the last 12 months).

(Source: BTMA Stock Analyzer – Misc. Fundamentals)

The Story Behind The Dividend

In regards to dividend history, I’m first interested in knowing if the payout ratio is sustainable. At this time, it’s around 17%, which means that there is still lots of room to grow the dividend. Also notice that MGPI has a regular history of buying back shares, which contributes to higher payout ratios.

If we look only at the dividend yield, we see a range of 0.21% to 1.19%. This stock pays out a small dividend. Dividend yields have increased somewhat consistently over the 5-year period. Therefore, this stock may be desirable for some dividend investors. Also, notice that payout ratio has increased consistently over the same period.

Although MGPI participates in share buybacks, sometimes buybacks don’t make sense, as according to Warren Buffett:

“There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.”

In the example of MGPI, the company appears to have ample equity as indicated by its satisfactory debt-to-equity ratio, and it has plenty of cash to cover its short-term liabilities. Now, let’s consider its borrowing capacity.

As noted earlier, MGPI has entered into a five-year $300 million revolving credit facility and increased its credit availability by $150 million. This, along with its responsible financial situation, indicates that the company has sensible borrowing capacity.

Now, to see if the buyback timing made sense. From 2016 – 2019, MGPI seems to increase its buybacks each year with no real strategic plan for conducting more buybacks when share price is down.

If I were currently interested in buying MGPI now for the dividend, I would be trying to buy when the dividend yield was highest relative to its past. From the chart below, we can see that the dividend yield is near a somewhat high point relative to the past 10 years. Therefore, it’s a fairly good time to buy now if my priority is a better than average return through dividends.

Overall, the dividend situation with MGPI is better than average. On the positive side, the stock’s dividend yield and payout ratio has been increasing over the past 5 years. MGP Ingredients also aims to regularly return value back to shareholders through buybacks. Finally, the dividend yield is near a somewhat high level when compared with the past 10 years.

On the negative side, share buybacks haven’t been completed at an opportune time to return the most value to shareholders, and the company pays a small dividend.

This analysis wouldn’t be complete without considering the value of the company vs. share price.

Value Vs. Price

For valuation purposes, I will be using a conservative diluted EPS of 2.17. I’ve used various past averages of growth rates and PE ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.

In the table below, you can see the different scenarios and, in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.

(Source: BTMA Wealth Builders Club)

According to this valuation analysis, MGPI is undervalued. But because of the unpredictability of the company, the valuation cannot be considered as definitive.

  • If MGPI continues with a growth average similar to its past 10 years’ earnings growth, then the stock is overpriced at this time.
  • If MGPI continues with a growth average similar to its past 5 years’ earnings growth, then the stock is undervalued at this time.
  • If MGPI continues with a growth average similar to its past 10 years’ book value growth, then the stock is overpriced at this time.
  • If MGPI continues with a growth average similar to its past 5 years’ book value growth, then the stock is undervalued at this time.
  • If MGPI continues with a growth average similar to its past 5 years’ total equity growth, then the stock is undervalued at this time.
  • According to MGPI’s typical PE ratio relation to the S&P 500’s PE Ratio, MGPI is undervalued.
  • If MGPI continues with a growth average as forecasted by analysts, then the stock is overpriced.

This analysis shows an average valuation of around $48 per share versus its current price of about $34, this would indicate that MGP Ingredients is undervalued.

Forward-Looking Conclusion

According to the facts, MGP Ingredients is financially healthy in a long-term sense in having enough equity as compared with debt, and in the short term because the current ratio indicates that it has plenty of cash to cover current liabilities.

Other fundamentals are volatile, including ROE, ROIC, and EPS. While most fundamentals are at good levels, they do not show consistency, which makes the company harder to predict.

The dividend situation is better than average as the company has increased the yield and payout ratio over the past 5 years, and the dividend yield is near a somewhat high point relative to the past 10 years.

Lastly, this analysis shows that the stock is undervalued, but this valuation is not certain because of the unpredictability of the company.

Another way to visually see the unpredictability of this company is to compare MGPI’s long-term share price performance vs. the S&P 500. You can see that MGPI took a beating during the recession of 2008 and showed no real growth and even negative growth during subsequent years. In years post-2015, the stock showed accelerated price growth. By contrasting MGPI’s stagnant, then up and down performance vs. the gradual performance of the S&P 500, we can visually see just how unpredictable MGPI is.

Predicted Growth

Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 0%. This year, analysts are forecasting earnings increase of 2.3% over last year. Analysts expect earnings growth next year of 2.25% over this year’s forecasted earnings.” (Source: Forecast Earnings Growth)

If you invest today, with analysts’ forecasts, you might expect about 0% growth per year. Plus, we’ll add the current 1.17% forward dividend. This brings the annual return to 1.17%.

When looking at the past, growth rates are all over the board, which makes the stock more difficult to estimate future growth and returns.

If we just focus on the past five years, which don’t include negative growth, we can come up with some more stable growth rates: Earnings growth as 10.4% annually, Book Value growth was 15.5% annually, and Cash Flow growth was 19.5% annually.

So, if we based future growth off of the past 5 years’ performance, we might expect returns of over 11%. However, since fundamentals have been declining, and analysts’ forecasts are pessimistic about the company, I prefer to take a much more conservative view of the company’s future returns.

If considering actual past results of MGPI, which includes affected share prices, and long-term dividend yields, the story is a bit different. Here are the actual 10 and 5-year return results.

______________

10 Year Return Results if Invested in MGPI:

Initial Investment Date: 2/19/2010

End Date: 2/19/2020

Cost per Share: $7.69

End Date Price: $33.60

Total Dividends Received: $1.31

Total Return: 353.97%

Compound Annualized Growth Rate: 16%

_______________

5 Year Return Results if Invested in MGPI:

Initial Investment Date: 2/19/2015

End Date: 2/19/2020

Cost per Share: $14.60

End Date Price: $33.60

Total Dividends Received: $1.06

Total Return: 137.40%

Compound Annualized Growth Rate: 19%

_________________

From these scenarios, we have produced results from 16% to 19%. I feel that if you’re a long-term patient investor and believer in MGPI, and its existing products (distilled spirits, specialty wheat proteins and starches), MGPI could provide you with around 11% or as high as 19% if you sell when the stock is high, but if you’re impatient and need to sell during downtimes, you might experience a negative return.

For me, the choice is certain. I would take an objective look at this company and realize that MGPI might currently be an undervalued stock, but it’s also an unpredictable company with volatile fundamentals and questionable forecasted growth. It’s a far thing from a sure bet. I’m not going to drink up what MGPI is serving. Instead, I’ll keep searching for more solid companies that are easier to estimate future growth and returns.

If you want to find good companies at bargain prices that will provide you with long-term returns and dividends or monthly swing trade profits, then my Seeking Alpha Marketplace service (Good Stocks@Bargain Prices) is a good match for you. I combine the proven methods of Warren Buffett’s and Benjamin Graham’s value investing with a practical system to apply these methods into today’s market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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