Fundamental Analysis of Beyond Meat - BYND

Now that the first wave of hype has died down around Beyond Meat, we can take a step back and look at the fundamentals in a bit more detail. What makes Beyond tick, and are they set up for the future?

What Does Beyond Meat Do?

They are one of the fastest-growing food companies in the US, offering a portfolio of plant-based meats. There are a few players in this space, but Beyond has taken the approach of building meat directly from plants. In the fake-meat market, there are several blockers to converting traditional meat-eating customers, taste, texture and other sensory attributes. While at the same time aiming for the nutritional and environmental benefits of plant-based meat products.

While Beyond has their production facilities, they also co-manufacturer with other firms, this is how they have expanded into Canada and the Netherlands.

I’m going to list all the planet-based alternatives as we are here as investors, the important bit to understand is how they separate their business lines and revenue streams.

Source: Beyond Meat Q1 2020 Announcement

The business is split into four areas, first by Geography. With a strong home base, almost three-quarters of revenue comes from the US. The rest is simply classified as international.

If you have ever looked at Beyond’s financials and these numbers seem wrong, they have recently reclassified international to include Canada, before this was considered part of the US (not sure how the Canadians felt about that.) The big figure to keep a close eye on is the international one. The CFO is extremely bullish about the Asian market, while there was a meat shortage scare in Asia that caused a brief rally for Beyond, this was speculation. However, the partner tests in the Asian markets have shown high demand either because of novelty or genuine customer desire to have an impact, whatever the reason, they will be entering Asia with a strong brand.

The other dimension of the business is how they distribute the products. Retail simply covers direct to end consumer sales, as well as supermarkets. The key difference is you are buying the branded product packaged up to prepare at home.

Foodservice means whenever you sell the product to a business who will prepare the product or alter it in some way before selling that onto the end customer. e.g. going to a bar and ordering a Beyond Burger with chips. The business who brought the burger from Beyond Meat would show up under the foodservice distribution channel.

With these two pieces of information, we can already tell Beyond’s distribution and geographic positioning. At home, there is a big focus on selling to customers to enjoy at home, with some partnership tests e.g. KFC. Outside of the US, the biggest push is through foodservice companies.

Now that Canada is included as international, that would skew the retail figures. Being the second market they started pushing their retail offering, it has had far more time to develop and benefit from the American marketing.

How Has COVID-19 Impacted Beyond Meat?

COVID-19 has impacted us all different, and seeing how companies have reacted is telling of managements style and positioning. Beyond has kept its manufacturing fully operational and sent head office staff to work from home.

Innovation and R&D have both slowed down. As this is a company seeking to break new ground it’s innovation efforts are key to its future growth. In-person and feet on the ground marketing efforts have been frozen, however, marketing and promotion is by no means taking a break.

The real risk here is the protein and ingredients they source are globally distributed, meaning they are feeling the squeeze from any overseas sources.

However, one risk has already been felt. The foodservice business. Restaurants and the whole food preparation as an industry has taken a nosedive. While Beyond opened the year with very strong momentum and a string of exciting new partnerships, stay at home orders flattened these plans.

However, this has led to an increase in people shopping and buying food themselves. Causing a bump in retail orders. This has offset some of the negative impacts but make no mistake, Q2 2020 is going to make for some bleak reading. Beyond has already signalled that Q2 will be worse than Q1 as their revenue is crushed but R&D and most activities have carried on, in short, they are in a cash burn situation expected to impact the whole of 2020.

If you are a big Beyond fan and wanted to know why there are no new partnerships or marketing, don’t be surprised if they are delaying these until closer to the end of 2020 to create a more impactful 2021.

What About The Fundamentals?

I held Beyond Meat a while ago, and brought in around the hype as a momentum-based investment, I ended up locking in a nasty loss, meaning I am even more interested in how this looks compared to the rest of the market.

Source: Genuine Impact

Underperforming the rest of the market, and grossly overvalued is about what I expected. However, if we want to understand what is going on with Beyond we need to dig into this some more.

It’s no secret that Beyond Meat isn’t a profitable company. But I want to see for myself what this means for their accounts and where the money is going. Last quarter Beyond brought in $354.76m and posted a loss of -$3.97M.

I am extremely off-put by the 33.49% gross margin. The cost of simply producing the goods is extremely high, leaving almost no room for any other activities or investment into scaling the business. All it takes is for a key supplier to increase their prices to force this gross margin as tight as possible. In terms of risks to the business, the scalability is at risk which such high production costs. Keep in mind the gross margin doesn’t include R&D, marketing, one-off costs, or even admin activity. This should be the costs directly related to creating revenue.

If you are a dab hand at statistics you would have worked out the profit margin is -4.18%, meaning we are loss-making.

Source: Beyond Meat Q1 2020 Announcement

Now the quarterly report does show a small profit being made (there were some interest payments about half the value of the profit and a very very tiny amount of tax.) Which is great to see, but we already know they had a better than expected start to the year, with next quarter being a very serious drag. If it was not for COVID-19 Beyond was on the edge of posting it’s first annual profit.

Source: Wallmine

Historically Beyond has struggled as it chased market share and brand promotion. With no dividend and a high growth strategy, and another year of losses ahead of us, there is little value as a shareholder. While Beyond is in this growth stage investors are taking a very long term view or holding for shorter-term share price improvement based on optimism.

One thing that did stand out to me was the debt control. In the cash screenshot, we can see the assets to debt being relatively well managed with a sudden boost in financing. I wanted to look at the recent quarters to understand what is happening in the short term.

$246.4m in cash, and $120.7m in inventory against $71.9m in current liabilities, with most of this, focused on accounts payable. Looking at the longer-term debt I only see $43.4m on the balance sheet. All in all, they aren’t as leverage as I would expect from a high growth company.

Source: Wallmine

I mentioned Beyond is very overvalued right now. After covering their finances this shouldn’t be a big surprise.

Source: Yahoo Finance

We have a price to sales ratio of 24.33x, price to book of 22.47x, even the price to earnings to growth is a nasty 8.30x. In terms of buying Beyond based on their inventory or assets, it just doesn’t justify the entry price.

Low-value high growth companies are very common, which represents the high level of risk involved with this strategy. Either we’ll see the explosive increase in debt (thankfully they are low on debt so this is an option in a pinch) or a ramp-up in R&D spending resulting in more years of cash burn and loss-making.

I’ve been told I can’t look at high growth, speculative, young companies like Beyond Meat in the same way as an established player. However, without the fundamentals and judging what risks we are comfortable taking, what will be basing our investment decisions on? As someone burnt once by Beyond Meat these valuations and deep speculative bets are a warning.

However, I am not an expert, that much should be clear. With that in mind, what do the sell-side experts have to say about Beyond Meat?

Source: Genuine Impact

I am slightly surprised at the even split of analyst ratings. I wanted to dig into this some more, as analysts don’t all rate at the same time, and given the market, a lot of them have been extremely busy.

We only have 9 analysts who have posted new guidance within the past month. Given how explosive the share price has been this does leave us behind a bit.

Source: MarketBeat

Ignoring the differences in analyst numbers, the striking aspect to me is the overwhelming sell shift and the lower target price. With the average coming in at a 30% discount on the price right now.

We have Bank of America setting a target price of $68 a share but on the other hand, BTIG believes it’ll be $173 (both lower than what I paid but I’m not upset at all.) The range is huge. With spotty fundamentals, an extremely painful incoming 2020, and no clear dominant player in the market, this is a hard stock to judge.

Source: Genuine Impact

The future share price returns are a complete unknown, with poor confidence where it will be. Putting a value on the company results in an overvalued mess, but buying into the hype sets us up for 50% return expectations, with very little in between.

What we do agree on is the high growth of revenue and potential EPS in the future. We know 2020 is going to be another year of struggle, but looking past that we have seen great historic growth and we know they are on the edge of posting their first profitable year.

A Sell or A Hold?

As a recommendation, I would go with a hold stance. I sold out and locked in a loss because I wanted to deploy my money elsewhere. Unless you have that level of confidence then I wouldn’t see a strong reason to redeploy your capital.

If you are comfortable with a five-year horizon then Beyond is well placed to expand and become a profitable player who can optimise their operations. There is scope for improvement.

I would strongly advise against a buy. 2020 is going to be disappointing, the next three quarters will be lower than expected. Beyond have even said they will push a lot of their strategy into 2021 and accept this will be a weaker year. If you are keen to buy into Beyond Meat, there will be better opportunities. As long as you are a long term believer then there is nothing for you to do, but if you brought into the hype, you will find a faster recovery elsewhere in the market.

This has been a very tricky stock to judge, and I always love to hear your feedback! Let me know if Beyond on your watch list? Or maybe you already brought in?

Stay safe and thanks for reading!