MGP Ingredients – MGPI – is trading up 8.6% in early trading on Thursday to $16.75. We alerted our members that we were buying shares around $15.75 on August 6th in a Spotlight Research note to members and August 7th in our morning e-mail to members.

We Alerted Members August 6th

When we disclosed our position we stated that we are looking at the changes in certain commodity prices and what impact they may have on MGP Ingredients Inc. (NMS:MGPI)’s gross margins. For example, the company’s distillery products segment (81.9% of total sales in fiscal 2014) uses raw materials like corn and other feedstock. Wheat flour is used as a raw material in the company’s ingredients solutions business (18.1% of the total sales in fiscal 2014).

We are also performing valuation analysis. Currently, the stock is trading at a trailing Non-GAAP P/E of 15.5.  We think it’s reasonable that shares could trade at a trailing P/E of 20, provided our due diligence indicates the company can maintain the momentum established in Q2 2015.  A trailing P/E of 20 would translate into a target price of $20.77.

Strong Q2 2015 Results

Last week, MGPI reported strong Q2 2015 results:

• Q2 2015 sales of $92.1 million vs $85.9 million in the prior year
• Q2 2015 EPS of $0.44 vs $0.28 in the prior year

Quotes from management:

We continue to enjoy strong demand for our premium beverage alcohol products, particularly our whiskeys and non-GMO offerings. I am very pleased with the speed with which we have been able to refocus our investment and sales, marketing, and operations effort to meet this growing demand…

…We are making better than expected progress in implementing our new growth initiatives,” said Griffin. “Our progress in focusing on our higher value products is evident in the exceptional gross profit growth in both our business segments. The just announced launch of our Limited Edition Metze’s Select Indiana Straight Bourbon Whiskey is an example of our progress in capturing a larger share of the value chain. We are aggressively implementing our Invest for Growth initiative, to ensure we are in position to support the growth of our industries, business segments and customers.” Griffin added, “Despite a significantly higher effective tax rate this year, our improved operating income results drove growth in net income and EPS. We are making great progress in realizing the potential of our business and we are encouraged by the outlook for the remainder of 2015.”