BEYOND MEAT RECENT UPDATES
• Q320 results: Beyond Meat have missed EPS Refinitiv consensus (-$0.28 reported vs $0.05 estimated) and net revenues ($94.4 mn reported vs $120.8 mn expected), due to a sharp deceleration in retail sales in the Quick Service Restauration segment. The management attributed this missed objective to a delay in test of expansions of plantbased meat menu items.
• 01/26/21: Announcement of the creation of a Joint Venture with PepsiCo for the development of plantbased proteins. The company could benefit the marketing capabilities and outlets of the American soft-drink company.
BUSINESS MODEL & STRATEGY
Beyond Meat pitches itself for being the sustainable option to the world’s largest meat processors. Its portfolio of products is made up of Beyond Beef, Beyond Beef Crumbles, Beyond Breakfast Sausage, Beyond Burger, Beyond Fried Chicken, Cookout Classic and Beyond Meatball. The Beyond Burger accounts for 64%, 70% and 48% of our gross revenues in 2019, 2018 and 2017, respectively.
It partners with different retails and restaurants such as Pizza Hut, Taco Bell, KFC and Kroger which have a huge customer base. The number of potential new partners is high due to the growing vegan trend. Beyond Meat has also announced a new partnership with PepsiCo to develop snacks and drinks made from plants based proteins. The company has just a 2% household penetration in the US for the moment but the company is growing in the local market and the demand oversees is growing, especially in the Asia-Pacific region where demand is expected to grow at a rate of 9.4% till 2025. . Beyond Meat has signed an historic agreement to develop some production facilities in the Shanghai area, they will be the first plant based meat company to establish themselves in China. China is one of the largest market for meat, thus meaning that it could potentially become one of the biggest market for plant based meat. Beyond Meat has also signed agreement with Japan Airlines which will sell their product on some of their flights. The graph on the right that oversees revenue has been decreasing in the last quarters. This is mainly due to the fact that the pandemic has impacted the international distribution channel and that the stricter lockdown have temporarily decreased demand. Beyond Meat products can be bought in 28000 retail outlets and 36000 restaurants across US and Canada. Beyond Meat is moving to a new headquarters with cutting-edge technologies. This is a clear signal that they intend to stay on the forefront of innovation in the faux meat space. Beyond Meat will benefit for the vegan trend that is takin place in the world. As consumers become everyday more aware about what they eat, they are switching more and more to vegetarian and vegan options. UBS predicts that the plant based meat market will grow to $50 billion in 2025.
Even though Beyond Meat seems very well established for the long-term, it has many weaknesses.
As we can see on the right, COVID-19 had some drastic effect on the revenue produced trough Restaurant & Foodservice which has decrease almost by 50 % in 2020. Beyond Meat has a limited range of products which cannot satisfy the costumers with the most demanding needs. Furthermore new competitors such as Boca Foods, Impossible Foods and Tyson Foods are establishing themselves in the market. Impossible Foods implemented a price cut of 15% and has increased its production level by 500%.The company has an history of losses. In 2019, 2018 and 2017, they incurred net losses of $12.4 million, $29.9 million and $30.4 million, respectively. These figures are worrying but, they can be justified by the fact that they are expanding at a really high level and they are investing in innovation. This is critical in order to establish themselves in a market that is becoming more and more competitive.
Beyond Meat has only one supplier for the Pea Protein used in Beyond Beef. The supplier is Roquette, one of the biggest player on the world market. The company has only three suppliers for the Pea protein needed for the other products. The company has already suffered the consequences of having a limited number of suppliers with a relatively high number of delays and interruptions in the past. This problem is going to get worst as COVID-19 is causing many logistic problems as well. Furthermore, having a low number of suppliers decreases the negotiation power that the company has for raw materials.
The commercial success of Beyond Meat also depends on how well they can defend their intellectual property. Patents can help the company to keep is competitive hedge only in part as the usually last for a fixed amount of time. Any opposition to these patents will prevent the company to commercialize new products. They currently have 18 pending patent applications. US laws on patents are unclear, complex and often changed.
Beyond Meat prices are higher than normal meat options. The Beyond Burger is selling for around $12 a pound while vegetable burger patties cost $6.40 while a ground beef burger on average just cost $5. Beyond Sausage products are 70% more expensive than normal pork sausages. Normal chicken options are also a much cheaper meat option.
OWNERSHIP
The biggest shareholder of Beyond Meat are: Baillie Gifford & Co with 8.49 %, The Vanguard Group 6.44%, DNSBYMT6.05% and Blackrock with 3.1%.
MANAGEMENT & ESG ANALYSIS
The administration of human resources is outsourced to a U.S PEO, professional employer organization. This decision may help managers to focus more on the core business rather than the payroll administration. On the other hand, by outsourcing human resources, beyond meat does not have a direct control of this department whose negligence might cause a failure to comply with the Fair Labor Standard Acts thus hurting directly the company. In terms of environmental sustainably Beyond Meat has pitched itself as an hearth friendly alternative, as the meat that they produce in laboratory is by far more sustainable than real one and at the same time is able to maintain the same nutrition properties. A burger produced by this company requires substantially less water, greenhouse gases and energy than the quantity required to produce a normal burger. Beyond Meat was awarded, “Champions of The Earth” by the United Nations for their sustainability efforts. For instance beyond the product, other environmental friendly practices are implemented such as using compostable tray instead of plastic one.
Environment: the company has not been completely transparent on the amount of greenhouse emitted and the amount of water discharged.
Social: Beyond Meat is collaborating with EVERFI, one of the main digital educator, to create a free science based course on sustainability.
Governance: In 2020 the company received a class action by investors as according to the complaint, the company made some false and misleading statements. A food safety consultant’s report was falsified and a breach of agreement with a supplier exposed the company to legal liability as it was a breach of the federal security laws. When these information was disclosed to the market, investors suffered damages.
ESG Reuters score :
Environnement Score: D+
Social Score: D+
Governance Score: C
Overall ESG: D
MARKET OVERVIEW AND OUTLOOK
Why a meat substitute?
First, we need to distinguish two markets: the meat substitute market and the cultured meat market. A meat substitute is a vegetal meat based on plants to reproduce the texture, the perfume, or the appearance of real meat. Cultured meat is a meat made in a laboratory by using animal cells.
Meat substitutes are very old: Tofu mas produced during the Han dynasty. Cultured meat is very recent. The first imitated meat was produced in 2013 by a Dutch pharmacologist, Mark Post. The initial problem of a labgrown piece of meat was its price. The first lab-grown hamburger costed 250.000 euros. The cultured meat needed big R&D investments and the participation of biomedical laboratories. In 2019, the consumption of cultured meat was still forbidden but in 2020, Singapore became the first country to legalise it.
The meat substitute market is still very young and small compared to the Conventional Meat market. Nevertheless, the market is fast-growing as it responds to many desires of consumers. Some consider meat substitutes as a viable solution to food production and sustainable feeding. Conventional Meat is more and more stigmatised in developed countries as a harmful production. Raising cattle is harmful to biodiversity (deforestation, soil erosion, climate change) and represents ethical problems (cattle exploitation). Meat substitutes appear healthier and more sustainable for developed countries.
Mintel Group lead a study in 2018 to analyse the perception of meat-substitute by the general population in the USA. Despite of the heavily transformed nature of meatsubstitute, more than 30% of the consumers surveyed perceived cultured meat as healthier than real meat. The companies want to come off the bad image of raising cows and pollution.
The market of meat substitute is more dynamic in developed countries. In poor and developing countries, livestock is more dynamic. Livestock accounts for 33% of agricultural GDP in the world. It is the more dynamic sector in developing countries who see an increase in real meat consumption. In developed countries, the number of meateaters is in stagnation or reduction.
The dynamism of the market is also due to its nature. The production is much easier because it only relies on plants. It is less vulnerable to shortages on the contrary with real meat market (Covid-19). Most meat-substitutes are based on soy, which is a very available production.
A fast-growing market
The growth of the market is due in part to the growing concerns about sustainability and responsible feeding. Mainly in developed countries, people look after more sustainable food but also healthier one. Increased consumption of plant-based diets could reduce emissions by 80% and reduce diseases like obesity, diabetes, cardiovascular diseases, and cancer.
To penetrate the non-vegan consumers, the meatsubstitute companies made their products more accessible. Beyond Meat sold its products in big supermarket chains such as Whole Food Markets and Kroger Co. Beyond Meat is developing a partnership with McDonald’s in the US. Beyond Meat announced in April 2020 a partnership with Starbucks in order to use Beyond Meat products in the Chinese Starbucks’ stores. Impossible Food has a partnership with Burger King in the US.
Many big actors of the food industry (Nestlé, Unilever) invested the market of plant-based food. Unilever bought The Vegetarian Butcher in 2018 to extend its portfolio and now supplies 100% plant-based food for Burger King’s “Rebel Whopper” in Europe. Unilever announced a milkfree ice cream with the “Magnum Vegan”.
Still a tiny market compared to the real meat industry but fast growing. The industry increased a lot in the 2010 decade. In 2016, only four firms were working on meat substitute. This number increased to 55 in the beginning of 2020. The sector also diversified because many animal flesh are now imitated, such as pork, shrimp, chicken, lamb and foie gras.
The use of technology will allow a fast growth for the market. The laboratories can now produce, with a smaller cost, soy concentrates, and they can isolate soy protein. The laboratories also develop Textures vegetable protein (TVP), a defatted soy product, with high protein content.
In 2018, the world market for meat substitute was valued $4,34bn and is expected to reach $8.15bn by 2026.
The global meat market will offer a growing place to meat substitutes and cultured meat in the next decades. Forecasts expect conventional meat to be smaller than cultured meat an meat replacement joined.
The Covid-19 pandemic and its consequence on the market
The effect of the coronavirus crisis was positive on the meat-substitute industry. Indeed, many supermarket chains faced meat shortages. The slaughterhouses hardly managed to adapt themselves with the hygiene norms due to Covid-19. In Spring 2020, you could find empty meat shelves in supermarkets like Kroger and Costco in the US. The meat-substitute industry found here an opportunity.
Their production of meat substitute is based on vegetarian ingredients much easier to find and to produce in healthy conditions. The industry decided to fill the deficiencies in real meat. According to the FT, the plant-based meat sales tripled in April 2020 compared to April 2019. The sales of fresh meat only jumped by 30% on the same period .
In many countries, the Covid-19 crisis revealed the importance of public health, the importance of new scientific techniques and raised awareness of the necessity to watch the quality of the food (Animal market in Wuhan). Many people realised that the challenge of the 20th century was mainly to feed the world with mass production. For them, the challenge of the 21th is to produce a healthy food to tackle the dangers of mass production: diseases, obesity.
The market also took profit of another pandemic: the bird flu. The outbreak is still present in many countries (especially India) and the outbreak became more virulent in 2020-2021. Many consumers are afraid of consuming chicken or eggs and may decide to consume more plantbased food or even cultured meat. In India, the company Clear Meat was founded in 2019. The company presents itself as the “India’s first Eco-friendly, Nutritious and Affordable Meat Initiative”. This sector is fast-growing in Asia. According to the Multidisciplinary Digital Publishing Institute, 50% of Indians are extremely likely to by cultured meat in the next year.
In 2020, Singapore became the first country in the world to allow the sale of cultured chicken. Cultured meat is not just a meat substitute, it is the production, in a laboratory of animal meat with animal cells. It uses tissue engineering techniques: it is not vegetal meat.
FINANCIAL ANALYSIS AND ESTIMATES
• Regardless of the Covid19 pandemic, Beyond Meat’s sales have skyrocketed in 2019, enhancing the firm’s transition towards delivery options. We think that Sales growth will give the possibility to the firm to increased its market share within the U.S meat category, based on the following competitive advantages: 1) product uniqueness, 2) improved customer perception of plant based nutrition, 3) growing concern with environmentally related effects to animal meat consumption. We then estimate a ~40% sales growth in FY20, in line with consensus estimates, post-crisis moderated rebound (~50% sales growth in FY21 and FY22) and a slight decline converging towards 15%, the growth average for the plants-based meat industry. Operating margins should increase quite rapidly within the next few years, reaching a two-digits number in FY22, and plateauing at 13% within five years.
• The company has a negative and declining operating cash-flow generation ($46.995mln for 2019), due to the fact that sales growth is lower than the increase in operating expenses and investment in net working capital. Capex is increasing and this is explained by a rise of restructuring and R&D expenses. Cash flow from financing shows a positive and increasing trend since the company has issued debt. FCF turning point will be critical for the company, we expect it to be in FY23.
• Beyond Meat’s revenues are broken down among retail and restaurant/food services as well as fresh and frozen platform. These categories do not contribute to the full amount of revenues but a significant part of it. The greatest revenue contribution is given by the restaurant & food service fresh platform (50%), followed by the retail fresh platform with 44%. The smallest category is the Restaurant & Food service frozen platform.
• The firm’s capital structure is very healthy, providing strong guarantees for the repayment of its debt obligations. Regarding the asset side, cash and cash equivalent represent 61% of total assets while current assets and non-current assets respectively 28% and 11%. From the other perspective, equity is 85% of total assets, whereas long term debt amounts to 4% and short-term liabilities to 11%.
Beyond Meat has 709 institutional owners and shareholders. Among these: Vanguard Group Inc, BlackRock Inc. Susquehanna International Group and Jane Street Group.
• In 2019, due to negative after-tax earnings ($-12.443 mln), Beyond Meat’s is not able and willing to pay any dividends to its shareholders neither now or in the next future.
VALUATION
• Our 12-month $94.5 price target is based on a DCF (DCF based on discount rate 12%, EBITDA exit multiple 12.5x).
• We adopted a peers-based approach for DCF valuation, betting on a 15% long-term sales growth and a 13% EBITDA margin, as the mean for the meat-packaged industry. Our capex and change in WCR projections for Beyond Meat are based on the evolution of its revenues, applying constant ratios from 2022. The 12.5x EBITDA exit multiple is derived of an LTM EV/EBITDA average in the meatpackaged industry. The WACC of 12% is the implied discount rate observed in the 5 past years on average.
• Trading Comparables valuation was not relevant for Beyond Meat, as the company’s EBITDA and EPS are still negative so far. Pure players in the plantbased meat industry like Beyond Meat do not exist: indeed, our company is operating in a niche market. Its main competitors which are listed are much bigger corporations which have a very diverse products portfolio – Tyson Foods, Nestlé or JBS –, and for which plant-based meat only represents a small portion of their products range and of their revenues. In addition, very early-stage start-ups are trying to penetrate the market such as Impossible Food or The Very Good Food Company but cannot be considered as true peers of Beyond Meat as a matter of size. Hence multiples valuation is not relevant for the company.
INVESTMENT THESIS
• We set a sell recommendation for Beyond Meat stock, with a 12-month target price of $94.5 vs $176.16 currently.
• Although we are confident on the long-term growth outlook of Beyond Meat, that will outperform the market due to its strong competitive advantage in plant-based protein, we do think that the current share price does not reflect growth expectations as shown in our DCF valuation. This analysis is shared by hedge-funds that have increased their short positions in Beyond Meat after the stock price surged in the past few weeks, raising the short interest up to 25% vs 11% in late November.
• We think that Beyond Meat’s share price is primarily driven by growing investments in “green brands” from portfolio strategists and overexcitement of individual investors who are attracted by the disruptive brand image of the company. The 20% rise of the stock after the announcement of the JV with PepsiCo demonstrates the strong volatility of the security, not driven by clear rationale.
• Upside risks are almost market-related with portfolio rotation, overreactions to positive news on the company or on the market – pressure from environmental organizations to decrease our traditional meat consumption, cultured meat development – and possible short-squeezes due to high short interest and high trading volume from individual investors. A full acquisition by a giant of the industry – Nestlé or Tyson Foods – seems very unlikely as the equity value is very high; this reduces positive effects of the premium on the share price. Downside risks are related to Beyond Meat’s dependency on its main supplier Roquette Frères that might push the prices up if agricultural materials prices go up, and growing competition from already set incumbents and start-ups that wish to penetrate the market thanks to disruptive transformation technologies