Interactive Investor

This trendy stock just sunk to a new low: time to buy?

2nd March 2022 08:53

Rodney Hobson from interactive investor

Our overseas investing expert called it right when he urged investors to sell this stock. After a massive decline, here’s what he would do now.

Results from plant-based food manufacturer Beyond Meat (NASDAQ:BYND) are becoming increasingly unpalatable. The slide in the share price from a peak of $156 last June has been nothing short of alarming. There is no sign that the trend is coming to an end at $47.

Fourth-quarter results were as disappointing as those for the third were in November. For the three months to the end of December, revenue slipped 1.2% year-on-year to $100.7 million, while gross profit was slashed in half at $14.2 million as margins were squeezed. These are hardly good figures from what is supposed to be a growth stock, especially coming at a time when investors are tending to switch to defensives.

Net losses tripled to $77.7 million compared to a loss of $24.5 million a year earlier. This is worse than it seems at first sight: last year’s figure was affected by Covid-related costs that did not recur this time.

Revenue and profit both fell short of expectations, so it was no surprise that the shares slumped 10.8% in after-market trading as soon as the figures were issued

Source: interactive investor. Past performance is not a guide to future performance.

While foodservice supplies remained strong across the board, retail sales were soft. Beyond Meat blamed the pandemic, though it is hard to see why Covid-19 would specifically deter shoppers from picking a non-meat alternative.

The fact that there were five fewer shipping days in the quarter does not explain away the fact that higher trade discounts had to be conceded. Beyond Meat’s share of what was expected to be a growing retail market is slipping, as it fails to achieve its expected leadership among a growing number of vegans and carnivores willing to try something else.

On the other hand, the surge in sales to restaurants has as much to do with the ending of pandemic restrictions as it does to the introduction of new products and improved distribution channels. Meanwhile, manufacturing costs are rising, hitting both sides of the business.

Beyond Meat remains ever more optimistic than investors are. It reckons the current quarter will produce revenue between $85 million and $110 million, a wide range that allows for joy or disappointment in equal measure. Analysts believe that the problems of the recent past will not go away soon.

Non-vegans will, rightly or wrongly, tend to regard a substitute for meat as being an inferior product. Why pay more than you would for the real thing? Yet that is precisely what retail customers are sometimes being asked to do. While pork and poultry substitutes are not particularly at a competitive disadvantage, prices in supermarkets for many Beyond Meat products are more expensive than for an equal weight of beef.

On that basis it will be hard to persuade the non-vegans who form a substantial majority of consumers to join the bandwagon and, therefore, earlier predictions that sales would hit $2.2 billion by the mid-2020s look fanciful.

In the meantime, inflation is taking off, leaving Beyond Meat among a wide range of companies across the spectrum scrambling to pass on costs to consumers who are also being squeezed. Supply chain issues have eased but have not gone away entirely.

The other big worry is that it is easy for rivals to compete in what is admittedly still a growing market, even if it is not growing as quickly as once seemed likely.

Hobson’s Choice: It is not too late to sell. There is no prospect any time soon of a dividend to compensate shareholders for any fall in the share price. Stay well clear until the slide comes to an end, and do not be tempted to believe that the downward trend is necessarily over if short sellers decide to cover their positions.

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

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