Happy Little Plants: Hormel Enters The Beyond Meat Arena

Hormel Foods Corporation (HRL)BYND, K, MKC

Summary

I've frequently made the argument that Hormel Foods (HRL) is the most attractive investment play on the consumer trend toward increased protein consumption. And I previously suggested that Beyond Meat (BYND) would not live up to its hype in part because the product has minimal competitive moat.

Those two threads wove together nicely on Wednesday as Hormel announced that it has officially launched its new line of plant-based protein products to compete with the likes of Beyond Meat, Impossible Foods, and traditional packaged food companies with vegetarian product lines such as Kellogg (K).

Source: Hormel presentation

Hormel is launching its Happy Little Plants line of various soy-based meat alternatives in grocery stores this week. The flagship product for now will be a soy-based ground meat alternative. It appears to be quite competitive in the nutritional sweepstakes, offering 20 grams of protein with just 180 calories. That's a solid 44% of calories coming from protein. Beyond Meat's four ounce patty also has 20 grams of protein, but due to higher fat content, comes in at 270 calories and a significantly lower protein to calorie ratio.

Source: Hormel - data based on 4oz serving.

While this isn't directly going after the burger market, there's plenty of interest in ground meat-like products as well. And Hormel is quick to note its entrant into the field is preservative free, has no cholesterol, and is gluten-free, along with being quite low calorie for that product category.

Hormel Stock Reaction Reminds Us Of Beyond Meat's Fantasy Valuation

Upon hearing the Hormel news, I went to look at the intra-day stock chart. Hormel stock briefly advanced roughly 1.5% on the news, but quickly gave back those gains:

Data by YCharts

Given that the company currently has a market cap of $23 billion, a 1.5% move (had it held up) would have suggested that Hormel's plant-based line of products was worth roughly $350 million of added market cap. Hormel currently trades around 2.4x sales, so it'd have to sell about $150 million a year of Happy Little Plants products to justify this sort of market cap gain for its new line of plant products.

That's a fairly reasonable assumption of where Happy Little Plants could be in a year or two, given the speed at which Beyond Meat has scaled from nearly zero to $165 million over the past couple of years.

In any case, attempts to value Hormel's plant-based meat product line show the absurdity of Beyond Meat's valuation. Just look at this:

Data by YCharts

Even after its recent decline, Beyond Meat is valued at nearly half of Hormel Foods in total market cap. This is despite the fact that Hormel earns 6x as much annually in net income, $990 million, as Beyond Meat earned in revenues over the past 12 months - $165 million. Unlike Beyond Meat, Hormel makes real money. It is also likely to generate solid profits out of the gate selling its Happy Little Plants products; Hormel is pricing them at $8.95/lb which should make for fat margins, given the price of soy protein. Since Hormel is already the #1 or #2 brand in more than 40 product categories, it also has substantial shelf space and logistical advantages at existing distribution channels over a small company like Beyond Meat.

Regardless, even if Hormel scales its meatless line into a big high-profit margin business, it still wouldn't move the needle that much, at least immediately. Hormel does $10 billion a year in sales after all. Beyond Meat's $165 million in revenues is a rounding error for a company of Hormel's size. And, with due time, Beyond Meat's market cap will also be a rounding error when compared to Hormel's.

Beyond Meat Owners Should Be Nervous

This Hormel news is both a positive for Hormel shareholders and also another worrying sign for investors in Beyond Meat and backers of Impossible Foods. Why's that? Because Hormel once again exercised cost discipline, choosing to stick to a budget rather than throwing around money to make a splash.

We can see this from a Minneapolis Star-Tribune article. They spoke with Hormel's VP of Corporate Strategy, Jim Splinter. The article noted that:

Hormel looked at acquiring a number of meat-alternative startups, Splinter said, but the smaller companies set their value higher than Hormel was willing to pay.

Hormel turned inward, seeing potential to build a plant-based line itself. It already has the refrigerated supply chain and distribution capabilities, plus the technological capabilities to create a viable product quickly.

Hormel established a small team of people from across the company to work in a fast-pace, startup-like environment, dubbed Agile. This group of Hormel employees was able to get the Happy Little Plants from concept to market in less than 10 weeks.

Hormel has been averaging at least one acquisition a year recently. It's a core part of their growth strategy to make bolt-on purchases. Management has had great success at it; buying small emerging food producers has helped the company achieve its long-term 10%/year compounded EPS growth rate target. They also have no net debt, so there were no leverage or balance sheet concerns to worry about in making a deal. And they were willing to make a move in this space.

But prices were too high. So what did they do? They built their own product in house, just as Tyson (TSN) did when it decided that Beyond Meat's valuation had gotten out of hand. And here's the amazing part: Hormel went from concept to putting the product on the shelves in 10 weeks! That's less than one quarter to go from the boardroom direct to consumers.

Beyond Meat has no moat here in terms of first mover advantage or anything like that when vastly larger competitors like Hormel can design new products from scratch and start shipping in less than three months.

Here's another troubling thought for Beyond Meat. Over the past 12 months, Beyond Meat has generated $165 million in revenue and spent $14 million of that - around 9% - on R&D. Hormel, by contrast, generated $9.5 billion of revenue, and spent $34 million - or 0.3% of that - on R&D. Hormel, despite having a tiny R&D budget as a percentage of costs, still has a larger scientific operation than Beyond Meat. If Hormel felt the need, it could jack R&D up to 1% of the overall budget for a time, spend $100 million a year on product research - outspending Beyond Meat nearly 10:1 - and flood the market with plant-based innovation. Beyond Meat already spends heavily on R&D and can't get too much more aggressive as it earns a tiny gross margin - 15% - and its net loss is widening as revenues have scaled up.

Hormel is far from the only company competing with Beyond Meat. Tyson famously sold its Beyond Meat equity stake even before the big BYND stock price run-up, preferring to go with their own Raised and Rooted product line. Kellogg just announced their Morningstar Farms Incogmeato line at the same time as Hormel. Nestle (OTCPK:NSRGY) is bringing a plant-based burger to the U.S., and the list goes on. Beyond Meat is just one small player in a large arena.

What's Next For Hormel Foods Stock?

HRL stock continues to trade quietly in the low $40s range. The company is just coming off a fine, if not particularly eventful earnings report that did little to move the needle. Overall numbers remain pretty flat given the prolonged slump in the turkey market and higher input costs due to the African Swine Fever. Rising avocado prices hit the profit margins for Wholly Guacamole as well. Despite all the apparent negatives, the company still achieved enough to be able to re-affirm full-year EPS and revenue guidance, and shares have traded slightly higher.

My longer-term game plan remains in effect. Once short-term earnings pressure clears up, particularly with turkey prices coming out of their multi-year slump, it should lift Hormel earnings above $2/share over the next year or two. Slap the usual Hormel P/E ratio of the low-to-mid 20s on there, and that gets it to a $50 stock price.

There's a big chase for yield on again in higher quality defensive stocks. Hormel, with its debt-free balance sheet and strong niche branded products, is one of the best-positioned consumer staples companies, and should enjoy a similar share price run-up like Hershey (HSY), McCormick (MKC), and Diageo (DEO) once the short-term protein pricing concerns blow over. Hormel stock has under-performed some of its immediate peers, but as a Dividend King at a fair price, it will get caught up in the yield trade soon enough:

Data by YCharts

As for Happy Little Plants, don't expect Hormel's entry into plant-based meat alternatives to make a big splash at first. That said, a big part of the appeal in Hormel stock is that they are happy to sell nearly any kind of protein that customers desire. We've seen them venture away from pure meat with its peanut butter (Skippy), various nut butters (Justin's), ready-to-go protein snacks and platters, and even protein drinks (Muscle Milk) for awhile before they sold that one off.

Now, if plant-based proteins become a big part of the market, Hormel is there on the ground floor of that trend as well. And if it doesn't work out, it won't be a big loss for the company. They didn't overpay to acquire a brand after all - if Happy Little Plants takes off, great. If it doesn't, it's no big loss, Hormel has the other major protein products covered as well.

Disclosure: I am/we are long HRL,MKC,DEO,HSY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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