Over the past six months, MGP Ingredients’s stock price fell to $28.39. Shareholders have lost 15.4% of their capital, which is disappointing considering the S&P 500 has climbed by 16%. This might have investors contemplating their next move.
Is now the time to buy MGP Ingredients, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think MGP Ingredients Will Underperform?
Despite the more favorable entry price, we don't have much confidence in MGP Ingredients. Here are three reasons you should be careful with MGPI and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. MGP Ingredients’s demand was weak over the last three years as its sales fell at a 6% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect MGP Ingredients’s revenue to drop by 15.8%, a decrease from This projection is underwhelming and implies its products will see some demand headwinds.
3. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, MGP Ingredients’s operating margin decreased by 13.6 percentage points over the last year. Even though its historical margin was healthy, shareholders will want to see MGP Ingredients become more profitable in the future. Its operating margin for the trailing 12 months was 3.6%.
Final Judgment
MGP Ingredients doesn’t pass our quality test. After the recent drawdown, the stock trades at 10.9× forward P/E (or $28.39 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.
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