Beyond Meat: catching a falling knife?

It was the poster boy for ‘fake’ meat, and remains optimistic about 2022, but things haven’t gone to plan. Here’s what our overseas investing expert thinks about the shares.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Providing vegetable-based alternatives to meat seemed a sure-fire winner as restaurants and food chains rolled out vegan dishes. Customers have returned to eating out as lockdowns have been lifted, yet somehow the benefits are not flowing through to Beyond Meat (NASDAQ:BYND). It is beyond belief why it cannot make profits in the current climate.

Beyond Meat sought to play down expectations a month ago, but revenue in the third quarter still came in below forecasts and, even more alarming, the loss widened. Guidance for the fourth quarter suggests sales will continue to be weak. That will mean a third consecutive quarter of disappointing figures.

The third-quarter loss of $54.8 million was nearly three times as large as in the same quarter of 2020, and it took the total loss so far this year to $101.7 million compared with only $27.6 million last year. Sales growth of 12.7% was way down on stellar growth last year and, alarmingly, the fourth quarter is likely to see a decline, which was unthinkable just a few months ago.

This raises worries that what looked to be a big growth market is in fact reaching saturation some five years after the alternative meat market took off in earnest. At the same time, the sector has become increasingly competitive, with a number of smaller but active competitors arriving on the scene alongside established food producers branching out into vegan lines.

Several factors are working against Beyond Meat, including severe weather in the United States, the spread of the delta variation of Covid-19 and the difficulty that restaurants face in recruiting staff. However, we still have to eat, and a fall in restaurant sales should have been compensated for in grocery sales. 

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Yet demand for meat alternatives in grocery stores has slowed, statistics suggest. This is a particular blow to Beyond Meat, which has dominated the supermarket sector for plant-based protein food.

Beyond Meat is optimistic about prospects for 2022, but it could well be mistaken in suggesting that its problems will ameliorate when the short-term adverse factors are behind it. Much will depend on partnerships with restaurant chains, particularly regarding the McPlant burger that McDonald’s (NYSE:MCD) is testing in a few US restaurants and has begun to sell in other countries. Another version of the burger is being rolled out in Pizza Hut outlets in the US.

Source: interactive investor. Past performance is no guide to future performance

In the meantime, Beyond Meat has some catching up to do in terms of developing a plant-based chicken alternative that tastes and has the same consistency as the real thing, which is what consumers tend to want. Kellogg (NYSE:K), among other competitors, had already built up a lead before Beyond Meat started its much smaller than expected rollout in July. 

Analysts are now wondering if the company has outgrown the abilities of founder and chief executive Ethan Brown, who led the company to a highly successful stock market launch in May 2019. He is considered to have vision but what is needed now is an administrator prepared to knuckle down with day-to-day operational details. This year has seen the departure of several second-tier executives, including those in charge of finance, operations and marketing.

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After a remarkable rollercoaster ride the shares are now back to the $80 level. The downward trend looks entrenched.

Hobson’s choice: I warned in January and in November 2019 that the shares should be treated with caution but did not expect them to fall back so sharply. They are now below my original $89 tip price, but buying now would be trying to catch a falling knife. Sell if you didn’t take profits when you had the chance. 

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.