This article first appeared on www.futurefoodfinance.com

Beyond Meat is arguably the poster child for the imminent alternative proteins foodtech revolution. It boasts a well-known brand name in a market that even sceptics think will reach $8 billion in just four years. Crucially Beyond Meat was also the first really big player in this space to list on the public markets back in May 2019 when its shares debuted at $65 before then racing up to a peak of $234 in July of that year. Since then, Beyond Meat ’s share price has yoyoed around as the first chart below shows.

In this article we are going to dig a bit deeper into its reported numbers to establish whether that price volatility is warranted. We’ll also try and put some sensible metrics on those valuations – marketing hype about a coming revolution in food is all good and well but at some point, the hard numbers need to prove current valuations. That has been made especially difficult in recent days as Beyond Meat becomes yet another candidate for the Reddit brigade, especially after Jim Cramer talked about the stock on his CNBC program Mad Money recently, arguing that its sales might grow dramatically after the lockdown. This must have come as a great relief to Beyond Meat as in recent months its shares have also been the subject of fairly pronounced short activity. In late January for instance its shares were up in a short selling squeeze with nearly half of its stock shorted at the time. It’s worth noting that as of mid May that short interest was still very high at 14m shares outstanding and a days to cover ratio of 3.38 according to Nasdaq.

Beyond Meat  share price since IPO

Blue line represents S&P 500 over same period

Poised for growth post lockdown?

In it’s most recent quarterly results Beyond Meat announced that it lost $25.1 million, or 40 cents per share. According to a Barron’s report on the business at the time “On an adjusted basis, which excludes expenses related to the Covid-19 pandemic, it lost 34 cents per share. Revenue rose 3.5% to $101.9 million. Analysts were looking for a 14 cent per-share loss and revenue of $103.6 million. The company said that the Covid crisis continues to weigh on its food service channel because fewer people are dining at restaurants. Revenue at that segment was down 42.6%.  In addition, a surge in supermarket sales the company enjoyed earlier in the pandemic, as consumers stocked up on groceries, has “moderated,” it said. Still, retail sales were up 76.3% from a year earlier. Citing uncertainty related to the pandemic, the company declined to provide a full-year forecast.”

Not unsurprisingly these results were not greeted with much enthusiasm by the markets but we would argue that it is probably not fair to read too much into these numbers – many analysts think, like Jim Cramer, that the business is now set to grow exponentially again post pandemic. The key for Beyond Meat is that it sells mostly – to date – down a wholesale route via key commercial partners to whom it supplies its plant-based meat alternative. And on this front it’s clear that Beyond Meat has been building an impressive list of partners, especially on the food service front.

These relationships include:

• McDonald’s (MCD) has signed a 3 year global contract which includes the Mcplant burger
• Yum! Brands (YUM)deal announced concurrently with the fourth quarter report. The latest product is through the KFC brand via the launch of its Plant-Based Spicy Beef Wrap. The wrap, which has no cholesterol and 12.8 grams of protein, is available for a limited time in over 2,600 stores in 28 cities across China. Yum’s Taco Bell and Pizza Hut brands are also working with Beyond Meat.
• Beyond Meat is also working with PepsiCo to expand into the snacking market via something called the Planet Partnership
• Online marketplace Thrive Market. Customers will be able to buy the company’s products, such as the Beyond Burger and meatballs, as well as single-serve meals featuring these products.

This enviable roster of food service partners also opens its up to an obvious risk – during lockdown customers have mostly avoided indoor dining in favour of drive through and takeouts. That’s led some analysts to worry that with outfits like McDonalds focusing on cutting service times to the absolute minimum, its partners will end up narrowing down their product range – and leave off plant based alternatives as a choice. Menu streamlining could, thus, work against Beyond Meat .  Analysts have also pointed out that Beyond Meat  is also behind the curve when it comes to increasing demand – especially in Asia – for white meat alternatives. Chicken sandwiches are proving hugely popular in McDonalds and Wendy’s and although Beyond Meat is working on a product it’s not in any restaurant at the moment.

Moving away from food service partners, Beyond Meat is also ramping up its product distribution into supermarkets especially into Europe where it has just opened a huge new factory in the Netherlands. Beyond Meat is telling investors that it expects solid second quarter growth and we see no reason why we shouldn’t see surprises on the upside in terms of sales growth.

But we also need to be aware that Beyond Meat is in increasingly competitive environment. This competitive landscape revolves around three key dimensions. The first is price. Alternative proteins are still priced as a premium product compared to meat and the push is to get the griddle point – the price of alternatives vs original meat – to parity. That means that even as Beyond Meat sells more produce, its revenue per product declines. There’s also the need to get more Beyond Meat product into mainstream supermarkets and diversify away from food service partners. This is presumably a higher margin business space. Lastly there’s growing competition in its space, especially from Impossible Foods which is rumoured to be looking at an IPO in the not too distant future. Impossible has also been consistently lowering the price of its plant based patties – most recently by 20%. According to Barrons “that means that the suggested retail price of an Impossible Burger would be $5.49 in thousands of grocery stores across the country, with similarly planned price cuts for other markets, from Canada to Hong Kong. “

That’s still double the price of a normal beefburger but the price pressure and intense competition is obvious. Its also worth noting that Impossible has, arguably, made more progress in developing its supermarket business compared to Beyond Meat. On the positive side, most of the big established food brand giants haven’t been making much headway against Beyond Meat and Impossible. Despite intensive marketing Kelloggs and Cargill – both of which have alt protein lines – haven’t proved much of a competitive threat.

One last longer-term threat comes in the shape of cultured meat, which will look and taste very much like traditional meat products. Cultured products may in the medium term disrupt the existing plant-based product.

Despite all the excitement about plant based products, we need to add a salty dose of realism on valuations. Beyond Meat currently boasts a market cap of over $9 billion but is only producing sales in the hundreds of millions of dollars range. The chart below summaries the profit and loss account for the last few years. In 2020 sales totalled $406m and the business produced a pre-tax loss (an increased one) of $52m.

To be fair to Beyond Meat, its core business is obviously in a disruptive growth phase (which was in turn disrupted by the pandemic) and it’s not fair (at this stage at least) to apply usual valuation metrics to the business, especially if it is likely to experience very substantial top line growth which should – at some point – means it moves into profit.

But even on this growth metric, we would argue that Beyond Meat is very highly priced in share price terms.  The next table below is an attempt to pin a possible valuation for future growth. In the table we have assumed two scenarios: the first consistent top line growth of 30% per annum for the next few years. We have then assumed a pre tax profit margin of 25% which we think is very generous. Market leaders in consumer brands such as Unilever struggle to get pre tax margins much above the 15 to 25% range. This gets us to possible sales in 2024 of just under $1 billion and pre tax profits of just under $300m. If we then generously assume a PE ratio of 35 in 2024, we get to a valuation of $10 billion, just a shade over the current market cap.

In scenario 2 we forecast based on even more generous numbers. We assume consistent 40% sales growth through to 20240 when sales hit $1.5 billion and we also assume a market beating 35% profit margin – a demanding number we think given the intense competition. On this analysis Beyond Meat could be worth over $19 billion by 2024, well over twice the current market cap.

But this latter assumption assumes extra ordinary top line growth AND market leading profit margins. The point of this analysis is that for the current share price to make sense, we would need to make some pretty optimistic assumptions.  And this is before we’ve even got to the near term risks and challenges. These are numerous and includes the fact that the business is losing Chief Financial Officer Mark Nelson in May. In addition, Beyond Meat is involved in various legal disputes : a California court recently ruled that Beyond Meat must pay supplier Don Lee Farms in their contract dispute. There’s also the real risk that Beyond Meat could experience modest inflation for some of its protein ingredients , which could also feed through into increased packaging and transportation costs. Lastly we’ve also made no assumptions about the need to keep capex spending high, or the possibility that price cuts eat into margins.

Valuations

What do analysts think?

It’s fair to say that analysts have been growing more cautious on Beyond Meat in recent months, as the table below shows. Analysts’ expectations for profits and growth have been sliding for the last few months and the consensus price rating is now only a weak hold. The consensus seems to be that Beyond Meat will get to $1 billion in sales by 2023 which we think is a tad ambitious.

As for individual analysts, US publication Barrons has been publishing some of the more vocal opinions. We’ve summarised the key observations below:

• “Credit Suisse analyst Robert Moskow reiterated a Neutral rating on the shares, writing that he’s increasingly hearing from investors interested in the stock’s recent move. He said that while he admires “the company’s competitive advantages in the fast-growing meat alternatives category,” he’s still on the sidelines, given that so much of what could make or break the stock hinges on actions taken by its fast food partners. The firm argues that despite the difficulties the plant-based protein maker faced during the pandemic, it isn’t a “broken growth story.”
• “Bernstein Analyst Alexia Howard boosted her rating on Beyond Meat (BYND) to Outperform from Underperform, and her price target to $130 from $101.
• “Citigroup. Analyst Wendy Nicholson reiterated a Buy rating and $133 price target. Nicholson is keeping the faith. “Beyond Meat is a strong player in an attractive and growing category…Despite the difficult comparisons (which we believe are well understood by investors), difficult competitive dynamics (which we also believe are well understood by investors), we still think there is a long runway [of] strong growth ahead for this company.” “We see room for the company to start to benefit just a bit from the early, early days of its newly minted partnerships …and continue to roll out newer and better tasting products while benefiting U.S. food service recovery.”
• “RBC Capital Markets. Data suggest plant-based meat could grow to be a $7 billion market opportunity by 2025 and plant-based milk to $12 billion. “They still only represent a fraction of consumption, but the direction of travel is clear; as consumers’ environmental and health concerns mount and innovation provides more appealing alternatives, plant-based penetration will increase rapidly”.
• “A. Davidson Analyst Brian Holland cut his rating on Beyond Meat (ticker: BYND) to Underperform from Neutral, although he did slightly increase his price target, to $135 from $133.
• “BTIG [earlier in 2021] warned that several factors are working against the plant-based protein maker this year. Blame the pandemic. Analyst Peter Saleh cut his rating on Beyond Meat (ticker: BYND) to Neutral from Buy, and removed his price target. He still believes “in the long-term trend toward plant-based meats in the grocery and food service,” but writes that near-term he is concerned that retail sales won’t be able to make up for lagging restaurant revenues. That is a problem, given the stock’s “hefty trading multiple.”
• P. Morgan, [also earlier in 2021]warns that the plant-based protein maker will be hit by higher commodity costs and slowing sales. Analyst Ken Goldman reiterated an Underweight rating on Beyond Meat (BYND) stock, and lowered his price target by $1 to $94.