- Signal from Noise
While the U.S. stock market gyrates minute by minute over every trade tweet by President Donald Trump, so far in its short life one new midcap seems immune to the market’s anxiety: Beyond Meat (ticker: BYND). It appears that not just vegetarians like the offerings of BYND, where trading has been active since the company’s initial public offering on May 2 at $25 per share. The stock has quickly nearly quadrupled this month and recently fetched $98.59 per share. With roughly 60 million shares outstanding, this maker of plant-based “meat” products sports a market valuation of nearly $6 billion on total sales of $88 million last year. You could say the stock is sizzling. BYND is a unique asset among publicly traded companies and there is scarcity value in play here, which should be considered. After such a rise, what’s an investor to do? At first blush, Beyond Meat shares seem richly priced given what is known about American food trends and the searing competition you can expect this company will face. The shares trade at more 23 times the next 12 months estimated sales of $260 million, compared to $88 million in 2018. Traditional food producers sell at two times. BYND isn’t profitable, nor does it look to produce profits in the near term. A lot of investments need to be made. And while there is a trend away from meat eating, it remains to be seen how sustainable that will be. I remember when steak houses were supposed to go out of business. But valuation alone isn’t enough to buy or sell a stock. Founded in 2009, Beyond Meat produces products that the company says tastes like beef, poultry and pork with the same texture but made from plant-based sources, using proprietary scientific processes. The company says it already has 30,000 distribution points, like grocery stores and restaurants. And the key positive here is that so far they’ve been able to get their products in the meat section of the grocery store. It’s not seen as a niche vegetarian fad and that’s a good thing. Source: Beyond Meat According to David Trainer, who runs New Constructs, an independent research outfit specializing in forensic accounting, the widespread availability of BYND’s Beyond Burger is impressive, considering it was launched in July of 2016. Currently, investors care more about growth than profits, he adds. Keep that in mind. Also on the plus side, Beyond Meat is growing quickly. For example, revenue grew 170% last year and about 200% in the first quarter. Costs doubled in 2018 and costs of goods sold rose about 170%. But this is typical for a fast-growing firm. The U.S. meat industry is worth $270 billion annually, and $1.4 trillion worldwide. The bulls say that if the plant-based meat idea takes just a small portion of that, companies like BYND will become very profitable. BYND itself in its SEC filings says that the plant-based meat category can eventually grow to $35 billion in the U.S. alone if it does as well as the non-dairy substitutes did against the milk dairy industry. Currently, BYND’s market cap is already over 15% of that future industry valuation. Some on Wall Street are more bullish. Barclays analysts have written that the alternative meat market could reach $140 billion in ten years, and JPMorgan initiated coverage May 28 at $97 with a Buy rating. Jefferies analysts suggested there was a “high probability” that McDonalds (MCD) would soon offer a plant-based meat product, which could be a big boost to the industry. Meanwhile, Goldman Sachs initiated BYND shares at neutral with a $67 price target. Nevertheless, one big concern should be the amount of competition about to hit the industry, thanks in great part to BYND’s success. Burger King, for example, is going to launch the “Impossible Burger,” made by Impossible Foods, a competitor. Boca Foods, Gardein, and Field Roast Grain Meat are rivals which should find it easier to raise capital now that BYND has blazed the trail. Conventional food makers are going to muscle in—just as combustion engine carmakers are threatening Tesla. Tyson Foods, which sold off its 6.5% stake in BYND—something they might now be wishing they hadn’t— is getting into the business, and other potential competitors that BYND identifies include Cargill, Hormel, JBS, and WH Group. BYND itself noted in filings that regulators, like the Food and Drug Administration and the U.S. Department of Agriculture, as well as the European Union, could take action to impact its ability to use the term “meat” or similar words (such as “beef”) to describe its products. Expect real meat producers to object. How does BYND stack up against the competition? If you look at the table below, you’ll see that industry P/S forward average is a little less than 2 times. If BYND grows revenues 200% annually (highly unlikely) through 2022, sales would rise to about $7 billion. Possible but how probable? If it grows revenue 100% annually (still high) then 2022 sales would be $1.4 billion. Given BYND’s pure play status and growth, in 2021 BYND could still be awarded an elevated P/S, though perhaps lower the current level. Source: FS Insight, FactSet If we posit P/S drops to a more conservative (but still higher than the industry) 4 to 6 times, for example, then in 2022 the market cap would be $5.6 billion to $8.4 billion ($93 share to $140), with a midpoint of $7 billion market cap ($117 per share). That is still significantly higher than the current price. If we see a sharp sales growth fade from 100%, you might see $1 billion in sales in 2022, indicating a potential $4 billion to $6 billion market cap, or $66 per share to $100 per share. Of course, Amazon, which was heavily criticized for years for not producing a profit, is a unique asset and has turned out to be one of the best investments of the past 20 years. Another unique company, GoPro, fell sharply from a very hot IPO. Where’s BYND on this spectrum? Shorting this stock seems foolhardy. Too dangerous. Yet I’m hard pressed to get excited about buying BYND at $98, even it turns out to worth $100 to $117 in 2022, given the risks. Very high expectations appear to be built into this stock price. Should BYND miss on earnings or revenue—not an uncommon occurrence—the stock won’t react well. Investors won’t have to wait long for results. BYND will be making its inaugural quarterly earnings report June 6. Approach this stock with caution. It’s oft-repeated phrase on Wall Street, but no less true and useful for it: in the short term the market is a casino, in the long term it’s a weighing machine.