Beyond Meat shows twitchiness of high-rated stocks

by Edmond Jackson from interactive investor |

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The fake meat maker’s shares slid 8% this week. Cutting through the hype around the firm, should you buy, hold or avoid?

Nasdaq-listed Beyond Meat (NASDAQ:BYND) saw an 8% fall this week in response to second quarter 2020 sales yet again beating expectations - up 68% like-for-like to $113.3 million (£86.5 million). This was helped by more people staying at home to prepare meals during lockdown. 

This far outstripped a 61% plunge in sales via foodservice operations such as restaurants. Yet its operating loss soared also, from $2.2 million to $8.2 million, due to those expenses more than doubling to $41.8 million. The company attributes this to hiring more staff and spending more on marketing, products and international expansion.

There were also $5.9 million costs of product re-packing and $7.6 million share-based compensation – as if signalling the all-round liberal approach to finance nowadays, from central banks to company boards - being lumped together within $34.3 million “general” expenses. 

A $50 billion global market by 2025

Quite often when a growth company has caught imaginations, its losses soaring along with revenues can be interpreted positively for the stock – given a large element of such losses relate to investment.

It may mean an inflated valuation for a small to mid-cap stock. But if they harness major new global demand then over time the company will grow into this. 

While meat substitutes have been around for decades they are currently gaining traction, as environmental and ethical concerns boost the number of vegans and the cost of meat seems to rise inexorably.

The global plant-based meat market is estimated to grow to $50 billion annual revenue by 2025, based on 2.5% substitution of total meat consumption compared with 1% currently. 

I am inclined to target circa 5% substitution or better, given the way Covid-19 seems liable to have a lasting effect on people’s budgets (as unemployment smoulders and could yet break into flames). 

Moreover, the UK success of Greggs’ vegan sausage roll shows how meat substitute, if well-executed and marketed, are perfectly acceptable. Vegan meals are also burgeoning in cafes, pubs and restaurants. Some people may also cut back on unhealthy meals such as steak and chips or pies, if anti-obesity movements intensify.

A big valuation nevertheless 

After listing in May 2019, Beyond Meat soared from around $65 to $235 that July, although a spike of euphoria created a classic “head and shoulders” chart pattern. 

The peak implied a valuation near $10 billion for a company with trailing annualised revenue (even now) of $400 million and requiring a highly ‘adjusted’ view of profitability. 

By last autumn the stock had fallen back to around $75 through November and December. Then came an early 2020 rally of more than $120 and a plunge to $54 linked to Covid-19 lockdowns spreading. Such volatility is to be expected - as an ongoing risk too - when ‘profits’ are so early-stage. 

Greed for Beyond Meat equity has returned, amid realisation this company is a likely overall beneficiary of Covid-19. Consumption of home-based non-meat meals has more than compensated for a decline in eating out, and as a cheaper alternative.

Yet this week’s drop shows the stock market as efficient at least for requiring proof of profits rather than playing a mindless momentum game. 

At around $133 currently, the capitalisation is near $8.3 billion, or around 20x possible sales this year. To my mind that is very full. Tesla Inc (Nasdaq: TSLA) entertains 110x sales, but stratospheric does not imply sensible.

Beyond Meat, Inc - consolidated statement of operations          
  Three months ended   Six months ended
  29/06/2019 27/06/2020   29/06/2019 27/06/2020
Net revenues 67,251 113,338   107,457 210,412
Cost of goods sold -44,510 -79,687   -73,945 -139,070
Gross profit 22,741 33,651   33,512 71,342
R&D expenses -4,212 -6,016   -8,710 -12,210
General expenses -15,515 -34,292   -26,692 -61,607
Restructuring expenses -847 -1,509   -1,241 -3,882
Total operating expenses -20,574 -41,817   -36,643 -77,699
Operating profit/loss 2,167 -8,166   -3,131 -6,357
Interest expense -741 -569   -1,474 -1,274
Warrant liability -11,744     -12,503  
Other expenses 898 -1,454   1,039 -744
Total such expenses -11,587 -2,023   -12,938 -2,018
Loss before tax -9,420 -10,189   -16,069 -8,375
Income tax 21 16   21 15
Net loss -9,441 -10,205   -16,090 -8,390
Net loss per share 0.24 -0.16   -0.69 -0.14
Weighted average shares 39,081,359 62,098,861   23,206,203 61,904,360

Source: historic Company REFS

Typifies decision-making in a Federal Reserve-inspired market 

It is ironic how the US stock market can be picky within a valuation paradigm that is frankly overblown. Is there ever going to be a pin – to return to rational pricing – while the Federal Reserve has a ‘whatever it takes’ approach to monetary expansion? 

Whether or not, Wall Street has the Federal Reserve in its back pocket. The central bank seems willing to tolerate multiples of asset inflation to achieve a modest multiplier effect in the real economy.  

The likes of Beyond Meat and Tesla (NASDAQ:TSLA) show the effect on investment decisions. You are not investing anyway at such valuations, rather essentially speculating, as there is no margin of safety. You either accept such stocks have long-term conjectural value and strap in for the ride, or avoid them. 

When conventional measures fail, there’s always discounted cash flow

Since the late 1990’s I have noticed that when basic ratios entertain silly levels in euphoric markets, discounted cash flow modelling then gets wheeled out. This I believe is because relatively modest tweaks to assumptions can have big effects on net present value, hence justifying ever-higher target prices for stocks. Promoters may not have Machiavellian intent; they are just caught up in the general mania. 

So I chuckle how, in the wake of Beyond Meat’s modest drop in its stock, discounted cash flow has appeared. One study I have seen assumes a $2.1 billion present value for a first 10 years' rapid growth in cash flow (despite US analysts being well out on expectations simply for the last quarter) and $11 billion for all future cash flows thereafter.

Discounting according to the yield on long-term US government bonds and dividing by the current number of shares derives a target price of $177, or 33% upside. 

The number of shares on which to base such long-term assumptions also seems highly speculative. I feel the appearance of such modelling is meaningful only to suggest a very well-developed bull market generally.

Pay attention to EBITDA

The earnings release includes a table for earnings before interest, tax, depreciation and amortisation, or EBITDA, which I have reproduced here. 

It shows how, despite a $10.2 million net loss in the second quarter, adding back $7.6 million for share-based compensation and exceptional $7.5 million Covid-19 expenses shows a “true” (sic) profitability of $10.9 million.  
That is fair enough, in the sense of how bankers might test a company for creditworthiness, stripped of ‘exceptionals’ both good or bad. 

If shareholders exact better control of the board, maybe share compensation largesse will become checked rather than ingrained. The Covid-19 costs do look linked to initial coping with the pandemic. 

Thus, Beyond Meat's EBITDA percentage of net sales over 10% in the like-for-like quarters and over 12% for the first half of this year is a good achievement.  

Beyond Meat, Inc - derivation of EBITDA          
  Three months ended   Six months ended
  29/06/2019 27/06/2020   29/06/2019 27/06/2020
Net loss, as reported -9,441 -10,205   -16,090 -8,390
Income tax expense 21 16   21 15
Interest expense 741 569   1,474 1,274
Depreciation & amortisation 2,052 3,272   3,957 5,855
Restructuring expenses 847 1,509   1,241 3,882
Share compensation expense 1,823 7,586   2,678 13,535
Covid-19 related expenses   7,482     8,657
Warrant liability 11,744     12,503  
Other expenses, net -898 1,454   1,039 744
Adjusted EBITDA 6,889 11,863   4,745 25,572
Net loss as % of net revenues -14.0% -9.0%   -15.0% -4.0%
EBITDA as % of net revenues 10.2% 10.3%   4.4% 12.2%

Source: historic Company REFS

Balance sheet can support ongoing growth

End-June cash was $222.3 million versus $50 million debt, although cash absorbed by operations doubled to $44.3 million during the first half year. Capital expenditure has ramped up from $7.5 million to $26 million, driven by investment in production capacity.

Last April the company entered a new five-year credit facility with scope up to $150 million extendable to an additional $200 million. Aside from the nagging issue of dilution if share-based compensation persists to much degree, medium-term growth looks underwritten. 

Competition is likely to increase, and there is a rival by way of privately-held Impossible Foods Inc. This announced a deal with Walmart only last week and already serves (in the US) Safeway, Albertsons and Wegmans Food Markets. 

This coincides with Beyond Burgers to be sold at Sam’s Club, the warehouse chain that is part of Walmart Inc. I would expect major food retailers to carry at least a couple of the major brands emerging, so would not worry about this. Beyond Meat has agreed a manufacturing collaborator to boost its production.  

Great long-term business, pity about valuation

The only way I can rationalise buying into a stock like this is a black swan event that slams the market generally. Otherwise, one's capital is at risk from mean-reversion of equity valuations, say if confidence was to break down in Federal Reserve stimulus after poor transmission to the real US economy.

This week’s drop in Beyond Meat shows how twitchy the highly-rated stocks now are. Definitely be aware of this company and its global potential, as meat substitutes could reasonably capture double-digit percentages of ‘meat’ sales. But for now: ‘Avoid’. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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