We came across a bearish thesis on MGP Ingredients, Inc. (MGPI) on Idea Hive’s Substack by Idea Hive. In this article, we will summarize the bears’ thesis on MGPI. MGP Ingredients, Inc. (MGPI)’s share was trading at $57.37 as of Oct 25th. MGPI’s trailing and forward P/E were 13.25 and 9.48 respectively according to Yahoo Finance.
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MGPI primarily serves as a wholesale provider of American whiskey barrels, presenting an interesting opportunity to capitalize on the anticipated downturn in the whiskey industry. The whiskey market has experienced a decade of increasing demand, further bolstered by pandemic-related consumption boosts. However, the industry appears to be transitioning from a historic supercycle, as indicated by declining whiskey prices across the board. This expected downturn is likely to impact the pricing of wholesale American whiskey barrels, which are critical to MGPI’s profitability.
The preliminary Q3 results reveal concerning trends, with MGPI expecting a 14% decline in sales, a stark contrast to the modest growth of 7% and flat performance observed in the previous two quarters. In the vital Distilling Solutions segment, sales are anticipated to drop by 36%, while the Branded Spirits and Ingredient Solutions segments also face declines of 6% and 18%, respectively. Furthermore, MGPI revised its FY 2024 guidance downward, projecting decreases in revenues and EBITDA by 7% and 10%, respectively, at the midpoint.
Notably, MGPI’s CEO explicitly acknowledged the detrimental impact of “elevated industry-wide whiskey inventories” on operational performance, suggesting that these challenges may persist at least through the year. This candid admission aligns with the prior assessment that the positive trends MGPI experienced previously might have been supported by legacy contracts that are now rolling off, leading to a more significant downturn in performance. The management’s decision to pre-announce Q3 results—a departure from their usual practice—indicates their recognition of an impending decline in operational metrics.
Additionally, sales growth for the premium-plus category within the Branded Spirits segment has slowed to just 1% in Q3, compared to more robust growth of 29% and 12% in the previous quarters. This weakening trend in premiumization poses further risks to MGPI’s outlook.
Overall, the recent update confirms that the inflection point in the American whiskey industry is now manifesting in the company’s operations. Continued deterioration is expected in MGPI’s performance in the coming quarters, with the stock already dropping 20% in after-hours trading. Despite this decline, MGPI remains overvalued, trading at multiples significantly above its replacement cost. A potential re-rating from its current enterprise value of $1.5 billion to a tangible book value of $0.3 billion could imply an over 80% downside.
The investment thesis for MGP Ingredients (MGPI) is based on the anticipated downturn in the whiskey industry, driven by declining prices and elevated inventories, which are expected to significantly impact the company’s profitability making it a short candidate.
MGP Ingredients, Inc. (MGPI) is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 18 hedge fund portfolios held MGPI at the end of the second quarter which was 22 in the previous quarter. While we acknowledge the risk and potential of MGPI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MGPI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.