MGP Ingredients Q3 Earnings: Can The Outperformance Continue? (NASDAQ:MGPI)

MGP Ingredients, Inc. (NASDAQ:MGPI) competes in the distilled spirits, branded spirits, and food ingredient, and has enjoyed a couple of years of its share price climbing in a sustainable upward trajectory, soaring from $22.00 per share on March 16, 2020, to over $113.00 as I write. By any measure, that’s a huge move.

It appears the company isn’t ready to slow down either, based upon its recent earnings report, which beat on revenue and EPS, with all segments the company operates in doing well.

Even so, the move by MGPI has been so strong, it does start to cause some concern over when, not if it’s going to correct, and to what degree. After all, it could crush investors thinking of taking a position at its current share price, as they could get caught under water if it collapses, even if afterwards it resumed its upward climb.

The main consideration there is how much of its performance is already priced in, and how much upside and momentum it has left before it corrects.

In this article we’ll look at the recent earnings report of the company, how its various segments performed, and how much gas it has left in the tank.

Latest earnings

Revenue in the third quarter was $201.2 million, up 14 percent, beating by $10.34 million.

Gross profit was $59.1 million, up 3 percent year-over-year, representing 29.4 percent of sales.

Operating income in the reporting period climbed 3 percent to $33.9 million, attributed to the increase in gross profit, as well as a decline in SG&A expenses by $600,000 to $17.9 million.

EPS came in at $1.06, beating estimates by $0.11, but down from $1.08 in EPS last year in the same quarter.

Adjusted EBITDA finished the third quarter at $38.7 million, up 1 percent year-over-year. Marketing expenses were up in the third quarter by $1.6 million or 29 percent to $7.3 million compared to last year in the same quarter. The increase came from the company focusing on it “premium plus price tier products within our Branded Spirits segment.” Cash for the first three quarters was $72.3 million, providing the company with options and flexibility to invest in growth initiatives as well as M&A.

Concerning its balance sheet, the company has a cash position of $50.7 million, total debt of $231.1 million. The company guides for CapEx of about $47.2 million for 2022.

Performance by segment

Distilling Solutions

Demand for new distillate and aged whiskey remains strong, and management expects that trend to continue, providing support for the long-term growth of the company.

MGPI generated record sales in the third quarter from the segment, with revenue of $108.6 million, up 19 percent year-over-year. Gross profit in the quarter dropped from $27 million last year in the third quarter to $25.9 million in the reporting period. That was attributed to commodity and natural gas inflation, along with oversupply in the markets in its “industrial and white goods offerings.” Sales of brown products was up 34 percent in the third quarter, while revenue from premium beverage alcohol jumped 22 percent. Demand from these categories remains strong and is expected to continue in 2023. The company’s inventory of aging whiskey and its scale advantage positions well to grab a lot of that business going forward.

The one downside for the quarter was with white goods, where revenue dropped 3 percent year-over-year. The underperformance was mostly from lower volumes of its premium beverage products.

Revenue from industrial alcohol products plunged 27 percent in the quarter as a result of lower volume. One of the reasons for lower volume was an increase in supply from competitors, along with rising input costs from corn and natural gas.

Consequently, margins are expected to remain under historical levels at this time. In the third quarter this segment had negative gross margins, that is expected to trend the same in Q4. With margin contraction with white goods and industrial alcohol, company revised its prior outlook from a decline of 1,000 basis points to as much as 1,500 basis points for full year 2022, resulting in an impact of about $20 million on the company’s performance; that is $5 million above prior estimates.

Branded Spirits

Its Branded Spirits segment showed modest improvement in the quarter, reaching $62.8 million, up 2 percent from the third quarter of 2021.

Gross profit in the segment jumped to a record $25.1 million, up 17 percent year-over-year, accounting for 39.9 percent of segment sales. The improvement in revenue came from an increase in case volume as well as higher average selling prices.

Premium brands usually command higher prices, even in inflationary periods as we’re in now. That should continue on for the foreseeable future. In other words, the company has pricing power in that segment of the market.

The major growth catalysts in the segment – on the top and bottom lines – were premium plus American whiskey and tequila offerings. This segment has been doing well since the company closed on the Luxco transaction in April.

Ingredient Solutions

Revenue in its Ingredient Solutions was at a record $29.7 million, up 24 percent last year in the same quarter. As with the other high-performing segments, higher sales were the result from an increase in volume and increasing average prices in the quarter.

Demand in this segment comes from the trend in consumer behavior toward increasing the amount of plant-based food to their diets. Management expects this trend to continue and be a sustainable growth catalysts alcohol for MGPI.

The company noted that is has started to receive orders from colleges and universities for its ProTerra brand, which it recently launched. If it’s able to gain a foothold in that market, this segment would really take off beyond current expectations.

Conclusion

The company has been doing well, and while I don’t expect demand for its products to collapse, there are a few holes showing from the inflationary environment we’re now in.

Its largest commodity expenses continued to rise in price, with natural gas prices soaring 73 percent year-over-year, corn prices jumping 56 percent from the third quarter of 2021, and wheat flour increasing by 20 percent.

While the company can pass some of those costs onto consumers, it can’t do it in all it segments or products. For example, in its white goods and industrial alcohol segment, raising prices wasn’t enough to offset the increase in input costs. That will remain a headwind as long as commodity prices continue to be inflationary.

Even though there’s a lot to like in the performance of MGPI, my biggest concern is shareholders could start to think in terms of taking profits off the table, which would catch a lot of overly exuberant investors who get some FOMO and enter at a share price that I think is elevated and due for a pullback.

For that reason, waiting for the stock to correct would be a good strategy for shareholder and new investors. For those in at a good cost basis, serious consideration should probably be given to taking some profits off the table before the share price inevitably corrects. There’s no way of knowing when that will happen, but the higher its share price goes, the further it’ll have to drop.

And even though the earnings report wasn’t bad, in light of its lofty share price, it doesn’t seem good enough to support a sustainable upward growth trajectory until it takes a breather.