Quick Value #193 - MGP Ingredients ($MGPI)

11.13.23 - White label whiskey distiller at 16x earnings

Nov 13, 2023

I recently hit my first bourbon trail distillery tour (even though my wife of 11 years is from Kentucky!) and discovered this gem of a business…

It’s a bit pricier than my typical coverage but it has the makings of an excellent business with great long term growth prospects.

Market Performance

Quick Value

MGP Ingredients ($MGPI)

What they do…

MGP is a manufacturer of spirts (bourbon, whiskey, vodka, gin, etc.). They make and sell products under their own brands as well as contract manufacture for other companies.

They operate under 3 segments:

Distilling Solutions — This segment white labels spirits like whiskey and vodka for other spirt brands. They also provide services like warehousing (i.e. storing barrels of bourbon for aging).
Branded Spirits — MGP makes branded products of their own which are sold through distributors.
Ingredient Solutions — They also supply ingredients like wheat, grains, and other inputs used the food industry.

This is a neat little business selling picks and shovels into the spirits industry. Say I want to start my own line of bourbon… if I didn’t have the money to build a fancy new facility and buy all the equipment necessary to make the product; then I’d go to MGP to buy the inputs for my recipe (corn, wheat, rye, etc.), pay them to distill those inputs using my recipe, and then pay to put my product in barrels and store it for 4-6 years before I can sell it…

Here’s a good overview of the various products/services within the distilling segment:

Lately, MGP is pushing for vertical integration by acquiring branded products of their own. They paid $475m for Luxco in 2020 and $105m for Penelope Bourbon in 2023.

Why it’s interesting…

Strong industry trends and high barriers
Strategy is expanding margins and cash flow
Valuation discount to history and peers

It helps when your business is exposed to massive industry growth tailwinds and that’s exactly where MGP is sitting… spirits have been gaining share relative to beer/wine for over a decade and that trend should continue.

This industry growth has fueled a lot of upstart spirits brands and MGP is playing right into that by “lessening” the capital requirements to get your own line of product on store shelves. That hasn’t meant zero competition but size and scale help when it comes to producing a very expensive product like whiskeys.

It hasn’t been a straight line of revenue growth for MGP but they seem focused on 2 things right now:

Exiting low margin / commodity businesses — MGP is winding down their “white goods” business and facility which is expected to have a large impact ($140m) on revenue but increase gross profit by a small amount (i.e. this was a negative margin segment)
Expanding owned spirits brands — They’ve already completed 2 sizeable acquisitions within the last few years and continue to look for more.

The net result of this strategy?

Revenue is growing (+15% CAGR 2021-2023), margins are expanding (22% EBITDA margin in 2021 to 23.6% in 2023), and EPS is growing (+14% CAGR 2021-2023).

Guidance calls for 2023 revenue of $825m, EBITDA of $195m, and EPS at $5.55.

One final comment on fundamentals… I’m new to the story so I don’t have the full backstory on this, but it sounds like management has been strategically building inventory of aging whiskey for many years in order to capitalize on higher fair values in the future (i.e. the more aged the whiskey, the higher price tag it should sell for). Inventory has ballooned and inventory turns are dropping

If you consider the revenue/earnings growth they’re already achieving as good results, then it’s possible there could be some “hidden” value sitting in inventory waiting to be cashed in at a future date.

MGPI has historically traded >25x earnings and today sits below 16x forward estimates (a 36% discount). Brown Forman owns a lot of prestigious brands like Jack Daniels and Woodford Reserve; they’re average >32x earnings over the past 10 years.

Summing it up…

I wouldn’t consider this a cheap stock with a catalyst by any means but… a) it’s not wildly expensive; b) it looks like a pretty good/entrenched business; c) it has industry growth tailwinds for years to come.

This is a vertically integrated business with high barriers to scaled production (i.e. massive capex).

Capital allocation is going almost entirely into working capital and organic capex so outside of the few acquisitions they’ve done, there hasn’t been much excess capital for buybacks or dividends. I’d expect more of the same in the future. It sounds like the plant closure could help on the capex front and M&A is still on the table. There are risks MGP overpays for additional spirits brands (a typically high priced industry) but perhaps they also have a frontline view of the best brands to approach from their own white labeling services?

The CEO role is about to transition into the hands of the recently acquired Luxco management team too… it’ll be interesting to see how or if that changes the approach to acquiring brands at a more rapid pace.