Shorting Beyond Meat - Is There Too Much Hype Around It?

Beyond Meat (BYND:NYSE) claims to place itself in the global meat industry worth approximately $1.2 trillion every year. With this assumption, how does the company fare well against retailer giants like Tyson Foods and fast food chains such as Mcdonalds?

What is Beyond Meat?

To explain why the company may be overvalued, it is important to first discuss what they do and what they bring to the market place.

Beyond Meat is an alternative meat provider, providing similar nutritional content to animal products and cater for all diets, such as veganism and vegetarianism. The company have a strong focus on animal care and well-being. They recently IPO'd at a share price of $25, but have grown over the past months at a rather impressive rate. Positive market sentiment and high investor demand has pushed the company to be valued, at the moment of writing, at $144.70 per share.

They earn revenue via two main business streams, their retail chains (Beyond Meat Burger, Beyond Meat Sausage and Beyond Tacos) and supplying food retailers (Honest Burgers and Gourmet Burger Kitchen). According to their Q2 2019 report, these were the key highlights:

- Revenues of $67.3 million, up 287% year on year

- Gross profits up at 33.8% of net revenues, or $22.7 million

- Losses up at $9.4 million, which is $0.24 per common share

The company board aim to meet aggressive growth targets, particularly in the advent of public funding through raising equity in the stock market. Their goals are to realise net revenues beyond $240 million, and adjusted EBITDA to remain above break-even.

The analysis

My analysis of the company shows that investor sentiment may be overvaluing Beyond Meat, especially since we need to consider which part of the market the company has positioned itself in. Other global giants, including Mcdonalds and Nestle, remain adamant to tap into the 'clean meat' industry and have the necessary resources to do so. Controlling most of their supply chains, these companies naturally possess purchasing and managerial economics of scale, something that Beyond meat may take years to realise. I will be drawing parallels to Tyson Foods, Nestle and Mcdonalds throughout my analysis.

1. Sales/cost ratio for Beyond Meat products remain too high

For many products that Beyond Meat produce, their Sales/Price ratio is much lower than the industry standard and company rivals, which could lead to question the profitability of the company in the long-term. If we compare to Tyson Foods entire food range, they currently operate at a S/P ratio of $135.14 - meaning for every $100 invested in this company, from shareholders, this would be the return in sales. It is important to note that Tyson Foods is the second largest processor of meats globally. Compared to Beyond Meat, the Sales/Price ratio stands at little over $3. The disparity in these figures suggest a real lack of sales volume, and even if more capital were to be invested from a price perspective, their sales would remain less than proportionate than the increased capital that would be invested. It therefore seems that in order for BYND to remain competitive, they would need to be able to generate over 4,400% of sales, which doesn't seem likely in the near future.

2. Competitive market conditions can ruin smaller firms

Tough competition from larger rivals in the global meat industry means BYND need to price its products higher to cover its cost of capital, which according to their Q2 financials remain high. Despite the company making a commitment to 'regain control' of their own supply chains, in which Beyond Meat produce 1/3rd themselves, it won't be enough to solve their margin issue with their main line of products. Looking at their retail line of products, gross margins are 20% for BYND burgers (their flagship product) compared to Tysons 12%, costing BYND burgers to be 2.4X the cost of a beef burger. If we were to level these two costs at similar prices of $6, BYND would lose approximately 37% gross margins per burger. As mentioned earlier, unless Beyond Meat can realise greater economies of scale within their retail side of the business, it seems unlikely that they would be able to lower costs to 'industry standard' before 2020. Continual stages of postive EBITDA, which have only been realised this financial year, could go towards further investments in research and development, given they invest the least in this segment.

3. Hype around a product that isn't actually healthy and could easily be copied

BYND currently has only one patent and 20 pending patents for their products, meaning if they want to reach their objectives of global growth by end of FY 2025, they must ensure that their products are protected. If not, market share could be contested by similar rivals servicing the plant-based meat demand, that could in turn leave BYND far from their earnings expectations, set at achieving over $240 million rather than previous goals of $210 million. Further to this, global giants McDonalds and Nestle have discussed opportunities to co-collaborate on a similar product to compete with the BYND burger, but Mcdonalds have launched in Germany this year with their own vegan burger, supplying 1,500 restaurants. From my analysis, it seems as if the global giants have already tapped into this demand for non-meat products.

In this analysis and concluding remarks

In this analysis of BYND, I used some basic modelling that I learnt doing a financial markets online course hosted by Yale University. I am enjoying learning more about the intricate details behind valuation techniques, such as CAPM and Efficient market theory.

All sources were used from Beyond Meat's Investor conference call Q2 and financial Q2 report.

By Shamsher Mann