MGPI Stock Study (7-12-24)

Posted by Mark on August 29, 2024 at 06:28 | Last modified: July 12, 2024 12:24

I recently did a stock study on MGP Ingredients, Inc. (MGPI) with a closing price of $74.83.

M* writes:

     > MGP Ingredients Inc is a producer and supplier of premium
     > distilled spirits and specialty wheat protein and starch food
     > ingredients. MGP also produces high-quality industrial alcohol
     > for use in both food and non-food applications. It operates in
     > three segments: Distillery Solutions, Branded Spirits Segment,
     > and Ingredient Solutions. Distillery Solutions provides
     > distillery co-products, such as distillers feed, fuel grade
     > alcohol, and corn oil: and warehouse services, including barrel
     > put away, storage, and retrieval services. It derives most of
     > its revenue from the Distillery Solutions segment.

Over the past 10 years, this small-size company has grown sales and EPS at annualized rates of 12.0% and 15.9%, respectively. Lines are mostly up and parallel except for sales dips in ’16 and ’19 along with EPS dips in ’18 and ’23. 5-year EPS R^2 is 0.83 and Value Line’s Earnings Predictability score is 75.

Over the past decade, PTPM leads peer averages but trails the industry despite increasing from 8.3% (’14) to 16.9% (’23) with a last-5-year mean of 16.0%. ROE also leads peer averages but trails the industry while decreasing from 24.1% (’14) to 12.9% (’23) with a last-5-year mean of 15.4%. Debt-to-Capital is less than peer and industry averages despite increasing from 9.0% (’14) to 26.2% (’23) with a last-5-year mean of 22.0%.

Quick (Current) Ratio is 1.9 (6.3) and Interest Coverage is 17.7 per M*. Value Line grades the company [only?] B+ for Financial Strength.

With regard to sales growth:

• YF projects YOY 9.7% contraction for ’24 and 5.4% growth for ’25 (based on 7 analysts).
• Zacks projects YOY 9.6% contraction and 5.1% growth for ’24 and ’25, respectively (3 analysts).
• Value Line projects 6.6% annualized growth from ’23-’28.
• CFRA projects contraction of 9.7% YOY and 2.4% per year for ’24 and ’23-’25, respectively (7).
• M* provides 2-year annualized ACE contraction of 2.1%.

My 1.0% per year forecast is a substantial discount to the one long-term estimate due to several near-term estimates projecting contraction.

With regard to EPS growth:

• MarketWatch projects 11.3% and 9.5% per year for ’23-’25 and ’23-’26, respectively (based on 7 analysts).
• Nasdaq.com projects 9.9% YOY and 8.4% per year for ’25 and ’24-’26 [4, 4, and 1 analyst(s) for ’24, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 11.0%.
• YF projects YOY 25.9% and 11.2% for ’24 and ’25, respectively (7), and 5-year annualized growth of 11.0%.
• Zacks projects YOY 5.3% and 9.8% for ’24 and ’25, respectively (4), and 5-year annualized growth of 11.0%.
• Value Line projects 8.6% annualized growth from ’23-’28.
• CFRA projects 27.9% YOY and 19.6% growth per year for ’24 and ’23-’25, respectively (7).
• M* projects long-term annualized growth of 11.0%.

I suspect data duplication with four long-term estimates of 11.0%. The number of analysts are few and it would only take a single analyst to vary an assumption here or there by a few tenths of a percentage point to get a result other than 11.0%. If they’re all the same batch of analysts, though, or all using the same primary source, then it makes more sense.

Data duplication would mean one 11.0% estimate and Value Line for a mean of 9.8% instead of four 11.0% estimates and Value Line for a mean of 10.5%. I am therefore lowering my below-the-range forecast from 8.0% to 7.0%. I am also using 2024 Q1 EPS of $4.33/share (annualized) as the initial value rather than ’23 EPS of $4.80.

My Forecast High P/E is 20.0. Over the past decade, high P/E increases from 12.9 (’14) to 26.0 (’23) with a last-5-year mean of 27.8 and a last-5-year-mean average P/E of 20.9. I am near bottom of the range [only ’14 and ’15 (18.6) are less].

My Forecast Low P/E is 12.0. Over the past decade, low P/E increases from 3.9 (’14) to 17.2 (’23) with a last-5-year mean of 14.0 and 10-year median of 12.8. I am forecasting below the latter.

My Low Stock Price Forecast (LSPF) is the default $52.00 given initial value from above. This is 30.5% less than the previous closing price and 24.5% less than 52-week low.

Over the past decade, Payout Ratio (PR) ranges from 3.8% in ’14 to 20.3% in ’20 with a last-5-year mean of 13.7%. I am forecasting below the range at 3.0%.

These inputs land MGPI in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 10.3%.

PAR (using Forecast Average—not High—P/E) of 5.6% is less than I seek for a small-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 15 studies in the past 90 days (my study and 8 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 6.6%, 8.0%, 21.9, 13.0, and 13.7%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 18.0 that is greater than MS (17.5) and greater than mine (16.0).

MS high / low EPS are $7.96 / $4.67 versus my $6.07 / $4.33 (per share). My high EPS is less due to a lower initial value and growth rate. Value Line’s high EPS of $8.40 tops both.

MS LSPF of $61.70 implies a Forecast Low P/E of 13.2: almost a perfect match to the above-stated 13.0. MS LSPF is 18.7% greater than mine, however, resulting in more aggressive zoning.

With regard to valuation, PEG is 1.1 and 2.3 per Zacks and my projected P/E, respectively: fairly valued on average. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly low at 0.83.

I think MOS is robust because my inputs (including most-recent-quarter initial value) are near or below respective analyst/historical ranges. Forecast Low P/E is the exception but significant P/E expansion (and stock appreciation) has taken place since ’14 from which I do not expect levels to return. I can’t do much comparison with MS due to the tiny sample size but as anecdotal reference, MS TAR of 18.0% is 7.7% per year greater than mine.

Looking back, I see a stock now trading at 2017 price levels when EPS is half today’s value. That is attractive.

Per U/D, MGPI is a BUY under $69/share. BI TAR criterion is met < $61 given a forecast high price $121.50.

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