Seeking Alpha

Beyond Meat's Recent Pullback Is A Buying Opportunity

|
About: Beyond Meat, Inc. (BYND)
by: Richard Durant
Richard Durant
Deep Value, research analyst, tech
Summary

Beyond Meat's growth remains robust, with increased competition having no noticeable impact on performance.

Declines in cost of goods sold are driving improvements in profitability, a trend that is likely to continue in coming quarters.

The recent pullback in share price presents a buying opportunity to investors who have faith in the company’s prospects as the fundamentals have not changed.

Beyond Meat's (BYND) investors should remain focused on the performance of the business and not short-term fluctuations in the share price. I believe the recent pullback is the result of an overreaction to the threat of competition and downward pressure from early investors selling to lock in profits after the expiry of the lock-up period. This could present an excellent buying opportunity for investors who have faith in the prospects of the company.

Despite increasing competition, Beyond Meat’s revenue is still growing rapidly, driven by increased geographic footprint, increased points of distribution and velocity growth. Beyond Meat remains focused on enabling the growth required to justify its valuation with its main initiatives, including:

  • Expanding its distribution footprint
  • Building the Beyond Meat brand
  • Introducing new products into the marketplace
  • Bolstering infrastructure and internal capabilities

The company now has more than 58,000 points of distribution across retail and food service globally and a presence in 53 countries. Along with growth in points of distribution Beyond Meat also continues to achieve strong velocity growth (144% over the past 12 months). Beyond Meat is applying the same aggressive pursuit of growth in international markets as it has in the United States and is investing in production capabilities in the markets that are most attractive to the company globally. Approximately 18% of Beyond Meat’s revenue is currently generated internationally, up from about 4% in the past 12 months.

Despite high pricing, revenue growth is yet to show signs of decline which bodes well for future growth as product prices are likely to decline significantly in coming years. Beyond Meat’s management team has indicated it plans on underpricing traditional meat within a 5-year time frame, which, based on recent prices, would require a drop from approximately 12 USD/lb to 4 USD/lb for the Beyond Burger. Beyond Meat also plans to maintain differentiated product lines with premium pricing.

Figure 1: Beyond Meat Revenue Growth Rate

(Source: Created by author using data from Beyond Meat)

Beyond Meat continues to expand its supply chain and manufacturing capabilities to meet rapidly expanding demand with co-packing capacity expected to roughly double in 2020 and extrusion capabilities expanding as well. The supply of protein has also been expanded and diversified and is sufficient for approximately $1.2 billion in sales in 2020. Beyond Meat’s management team remains confident that capacity will not be a constraint on the company in the short run, meaning any restriction on growth in the short term is likely to come from the demand side.

Profitability continues to improve (even as product prices decline) as a result of operating leverage and production efficiency improvements, along with a greater proportion of gross revenues from the fresh platform. Beyond Meat data indicated that the Beyond Burger price per unit was down approximately 4.3% for the quarter and yet gross profit margins expanded. Beyond Meat is targeting gross profit margins in the mid- to high 30% range and will likely continue to lower prices as costs decline to meet this target. I believe operating profitability is likely to continue improving, but the company maintains a focus on growth, meaning research and development and sales and marketing costs are likely to remain elevated.

Figure 2: Beyond Meat Operating Profit Margin

(Source: Created by author using data from Beyond Meat)

Wright’s Law

I believe Beyond Meat can achieve price parity with traditional meat as well as maintain current gross profit margins primarily based on Wright’s Law. Wright’s Law is a description of a commonly observed relationship between experience performing an activity and improvements in productivity. Many manufacturing industries have observed this phenomenon and achieved cost declines of approximately 10-20% every time cumulative production doubles. Industries where this phenomenon has been observed include automobile manufacturing, synthetic meat, photovoltaic cells and lithium-ion batteries. This improvement in productivity is independent of other factors like operating leverage and economies of scale.

I have modelled a potential path for Beyond Meat’s prices and costs, assuming a 15% reduction in costs every time cumulative production doubles and assuming Beyond Meat targets stable gross profit margins until price parity with traditional meat is achieved. This analysis is dependent on how quickly Beyond Meat expands sales and the productivity improvements actually achieved, but shows that Beyond Meat’s targets are feasible.

Figure 3: Potential Beyond Meat Cost Reduction Based on Wright's Law

(Source: Created by author)

On the Q3 earnings call Beyond Meat indicated that the cost of goods sold declined 25% over the past 12 months, going from $4.89 a pound down to $3.69, broadly in line with the amount expected based on Wright’s Law.

Competition

Concern over increasing competition has been one of the main factors leading to a decline in Beyond Meat’s share price. The success of Beyond Meat and Impossible Foods was destined to attract a large number of competitors and Beyond Meat’s management stated in the earnings call it has been expecting and preparing for increased competition many years. I believe Beyond Meat is still the best-positioned company in the plant-based meat market and while its ability to capture market share is unclear, I am confident its initiatives to develop its brand will result in a differentiated product with relatively high margins.

Beyond Meat is now the second-largest plant-based meat brand in retail in the United States and is growing 20x faster than the leading brand, according to SPINS data for total U.S. multi-outlet, natural and specialty channels. Beyond Meat reiterated on the Q3 earnings call that it has seen no impact on sales from increased competition and given the extremely high growth rates in the segment, I believe the impact of competition is unlikely to have a significant impact in the short run. In the long run, the impact will likely depend on to what extent Beyond Meat can remain a branded and differentiated product.

Product Development

Beyond Meat’s goal is to be a global protein company which is capable of meeting increased demand for protein. A large part of fulfilling this goal is the development of a much larger range of products. While the timeline for the roll-out of new products is currently unclear, the company is focused on products which simulate beef, pork and chicken and plan on increasing the number of Stock Keeping Units next year to drive revenue growth.

While Beyond Meat’s short-term focus is creating products which simulate the experience of eating meat, there is long-term potential for unique plant-based proteins to be developed which consumers value in their own right and not just as a meat replacement.

Partnerships

Beyond Meat continues to enter strategic partnerships with restaurant chains to introduce products including McDonald’s (MCD) PLT Burger, Kentucky Fried Chicken (YUM) Beyond Fried Chicken in nuggets and boneless wing form, Subway Beyond Meatball Marinara Sub and Dunkin' (DNKN) Beyond Breakfast Sausage. These partnerships range from limited tests for McDonald’s, Subway and KFC to widespread roll-out for Dunkin. Interestingly, it appears McDonald’s is not branding Beyond Meat on its menu, which allows McDonald’s to retain control over the product and easily change plant protein supplier.

These partnerships continue to be an efficient means for Beyond Meat to scale sales as well as create brand awareness and introduce new consumers to its products. In the long run, I believe it is unlikely that restaurant chains will continue to allow a supplier like Beyond Meat to have branded products on the menu, but the situation is likely to continue as long as Beyond Meat is able to create incremental sales.

Relative Valuation

Attempting to value Beyond Meat using valuation relative to peers is a futile exercise as Beyond Meat is a leader in a rapidly-growing category, which will likely be enormous and sells a differentiated high-margin product. Beyond Meat should be expected to trade at significantly higher multiples than most other packaged food companies as it will have significantly higher growth rates for the foreseeable future.

Figure 4: Packaged Food 12-Month Forward EV/S

(Source: Washington Post)

Gross Profit Margin

Operating Profit Margin

Sales Growth (annual)

Asset Turnover

Beyond Meat

20%

-30%

170%

0.66

Hershey (HSY)

46%

22%

4%

1.01

Mondelez (MDLZ)

40%

14%

0%

0.41

General Mills (GIS)

34%

17%

7%

0.56

Kraft Heinz (KHC)

34%

22%

1%

0.22

Campbell (CPB)

33%

14%

-7%

0.62

Conagra (CAG)

28%

12%

20%

0.36

Hormel (HRL)

21%

12%

4%

1.17

Hain Celestial (HAIN)

21%

14%

-6%

0.95

Table 1: Packaged Food Company Performance Metrics 2018

(Source: Created by author using data from company reports)

It is extremely difficult to value Beyond Meat given its high growth rate and uncertainty over future profit margins. If you believe plant-based meat will become a commodity or remain a niche product, then Beyond Meat is likely still overvalued. If you believe plant-based meat will become widely adopted by consumers and Beyond Meat will remain a differentiated brand, then its stock is now deeply undervalued. Based on a discounted cash flow analysis, I estimate the intrinsic value of Beyond Meat to be approximately 185 USD per share and believe this is an excellent buying opportunity for long-term investors despite potential for further price declines in the short term.

Disclosure: I am/we are long BYND. 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.