Drew Angerer
At the very start of this year I concluded that Beyond Meat (NASDAQ:BYND) was a bad recipe, as commercial traction was fading in the form of sales growth (or lack thereof) while increased costs only resulted in mounting losses, leaving shares still vulnerable for a further pullback with shares trading in the mid-sixties at the time.
That has certainly materialized as shares have lost another half of their value, currently trading at $35, although that actually marks a spectacular recovery from absolute lows at around $20 in recent weeks.
Some Background
After going public in the $20s in 2019, Beyond Meat was one of the stronger names in terms of momentum at the time, with shares trading at $200 just weeks after the public offering. This was in some way understandable as the company has seen sales grow from a mere $16 million in 2016 to $300 million in the year of the IPO, although a $12 billion peak valuation was very demanding at 40 times sales at the time. Note that the business was about breaking even at the time, but momentum faded quickly.
The company originally guided for 2020 sales around $500 million as consumers were adopting its products a result of increased focus on animal welfare, the environment and health of consumers, all trends which are still relevant today but no longer impact the business in the same way as they did before.
After the company posted an operating profit of $0.5 million on $298 million in sales in 2019, it was the start of 2020 which was still solid, yet it all went downhill from the second quarter onwards. Of course, this coincided with the pandemic, yet with Beyond Meat being active to serve both quick-service restaurants which were closed, but retail outlets as well, the company had a decent intercompany hedge against the pandemic and related restaurant closings.
As it turned out early in 2021, sales for the year 2020 only rose to $407 million, about a hundred million short of the original guidance, with operating losses of $49 million marking fifty million deleveraging from the year before as well. Despite this observation, shares still traded above $150 early in 2021, leaving me somewhat puzzled.
In January of this year, the company saw shares trade down to $65, translating into a $4.1 billion equity valuation, as the company has been incurring some net debt. With full year sales seen at $450-$475 million, valuations were very demanding with growth not convincing, yet operating losses already totaled $97 million in the first three quarters of the year, being a huge concern.
The resulting 10 times sales multiple, quality and taste concerns, a resulting lack of demand, but moreover huge losses made me very cautious as net debt has already been incurred as a falling share price did not provide a realistic route to provide liquidity route from that point of view.
What Now?
In February of this year the company posted fourth quarter results with revenues of $100.7 million actually being down a percent year-over-year as an unheard loss of $80 million was posted as the company prepared for growth which did not come, resulting in a huge increase in the cost base. For the year revenues came in at $465 million as the big shocker is a $175 million operating loss of course.
In a sense it was comforting to see the company guiding for 21-33% sales growth in 2022, translating into a revenue guidance between $560 and $620 million, as undoubtedly losses should narrow, but no guidance has been provided on that front. Some improvement is desperately needed as losses result in a rather rapid increase in net debt, although quite some liquidity is available.
On the commercial front, the company announced some distribution deals with the likes of Rite Aid and other distribution partners. In May, the company posted first quarter sales of $109.5 million, and while sales were up a percent on the year before, the company essentially posted break-even gross margins, with a huge $100.5 million loss reported. With volumes up 12%, it is pretty obvious that the company was embarking on huge price cuts to drive some kind of commercial traction, adding to the losses on the bottom line, as net debt inched up above the half a billion mark, which is quite discomforting.
While the company maintained the full year sales outlook, it could be expected that more losses will be incurred and that net debt will continue to rise, as leverage might soon become an issue given the lack of EBITDA, even though that has been incurred in the form of convertible debt.
With some 63 million shares outstanding it is very clear that expectations have been reset quite a bit. Trading at $35, equity still represents a $2.2 billion equity valuation, or $2.7 billion enterprise valuation. With revenues coming in just over the half a billion mark, the resulting 5 times sales multiple looks perhaps reasonable for a decent consumer package business with big margins, but the issue is that losses approach the revenue base in the case of Beyond Meat here.
Final Thoughts
From a fundamental point of view, Beyond Meat really misses the mark. The company’s losses are monstrous, its cash position is rapidly depleting, and the company is incurring a lot of debt with the share price and lack of earnings capability not providing a roadmap to raise financing. So the upside has to come from other factors which includes perhaps a momentum spike, driven by short interest coverage, but that is mere speculation.
The other form of speculation is a potential acquisition, but that is highly speculative as well. Yet with many big consumer package business and meat producers recognizing the opportunities in this field, this provides an opportunity to buy a dominant brand in this space at a reasonable revenue multiple.
That said, the fundamental issues are deep with gross profits essentially non-existing, indicating the degree to which the product has to be pushed into the market, as more competition which often is cheaper and better regarded, is quite fierce.
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