Beyond Meat (BYND) Gets Hit Hard By Coronavirus – What Should You Do?
Back in July, I answered the question – Should You Buy Beyond Meat?
Today, I give an update on the company and answer – Beyond Meat (BYND) Gets Hit Hard By Coronavirus – What Should You Do?
You can read the full article above using the link above.
But if you don’t want to; here’s a quick recap of the last article on Beyond Meat.
Should You Buy Beyond Meat?
The world changes fast…
10 years ago, if you would have said anything about meatless meats or veggie burgers you would have either gotten a confused look or a disgusted one.
Same thing probably 5 years ago.
But if you bring something like this up today, you’re far likelier to get smiles because “healthy” eating is more popular now.
If you bring up this same topic to a true believer in the vegetarian/vegan trend and they also invest in the market you’re likely to get the question “Do you invest in Beyond Meat?”
Beyond Meat (BYND) was founded in 2009 by vegan Ethan Brown. And its stated goal is to “replicate the look, cook, and taste of meat” by providing plant-based meats that take the place of burgers, sausage, ground beef, and chicken.
The company IPO’d on May 28th, 2019 and became the first pure play vegan/vegetarian “meat” based stock you could buy.
The following public companies offer vegan/vegetarian “meat” products.
- Hormel (HRL)
- Kellogg (K)
- Tyson Foods (TSN)
But these companies also offer a huge array of products with and without meat.
10 years ago, this was unthinkable.
In today’s world it a completely different story though…
Beyond priced its IPO at $25 per share.
Its first trade on the market was $46 per share.
It closed out its first trading day at $65.75 per share or 163% above its IPO price.
And as of this writing its shares are selling at $129.90.
This is an 420% increase from its $25 original IPO price.
It’s an extraordinary journey for the vegan based company so far.
And with more and more people wanting to eat healthier and “cleaner” today I want to tell you whether you should buy stock in Beyond Meats or not by evaluating its fundamentals… Not its hope like most other investment analysts do.
Is Beyond Profitable?
Let’s do a quick rundown of Beyond’s profitability and cash flow. Because profits and cash flow drive the long-term value and pricing of a stock over time.
I measure this in part by looking at two important metrics.
Operating profits and free cash flow/sales (FCF/Sales).
On an operating profit basis Beyond’s produced an average operating profit margin of negative 64.6% per year on average every year over the last 4 years.
Normally I like to go back a decade and look at these numbers, or at minimum 5 years. But I can’t do either in Beyond’s case because of its IPO in 2018. And its financial numbers only go back to 2016.
I look for any company to produce above 10% margins on a consistent basis to consider as an investment.
And Beyond’s got negative margins in this case.
These numbers also fall well below my threshold of what I look for to consider for investment.
But it’s also not the full story…
In the full year of 2019 Beyond produced a positive 1.5% operating margin for the full year.
And in the trailing twelve-month period (TTM) it jumped further to 3.8%.
EDITORS NOTE – TTM is the last 12 months data going backward consecutively.
Most startup companies produce unprofitability for years after they IPO. But Beyond is already profitable on an operating profit basis.
While these more recent numbers still fall well below my minimum threshold to consider as an investment, they’re impressive for a startup…
And they’re only one set of numbers.
What about its FCF/Sales?
Over the last 4 years Beyond’s FCF/Sales is negative 92.9% per year.
And there’s no redeeming this. Its negative to a huge degree every year including the TTM period.
This means the company is far outspending its profitability.
Its normal for startup companies to do this to continue growing the business. But it’s also unsustainable over the long term.
If it continues Beyond will have to continually issue shares and debt just to keep the business running.
Since its IPO a little over a year ago its already issued 16 million new shares. This is an increase in share count of 34.8% in a little over a year.
This dilutes shareholders and lower the value per share of the company.
Think of this like a pizza.
When Beyond issues more shares, the same size of pizza stays… But more people are around to eat it.
If a company keeps doing this the same size of the pizza remains but you continually get to eat less and less of it due to more people being around.
Right now, it’s using equity to keep the business running and to grow it. Many startups and high growth companies do this to continue growing.
These are just a few names of businesses in the high growth arena who followed this same model to becoming the behemoths they are today.
And it can work for a while… But at some point, the company will need to generate higher operating profits and cash flow to grow the business in a healthier way that doesn’t harm current shareholders.
As of this writing Beyond hasn’t had to issue new debt which a good thing.
Both operating profit and free cash flow are important because they help show you the profitability of the company.
The more profitable a company is the higher its value goes over time. And the more money it can spend on innovations and serving customers.
So Beyond doesn’t meet my minimum threshold to consider it an investment based on operating profits and free cash flow… But what about its valuation?
Beyond Is Massively Overvalued
As a conservative investor I want to recommend solid, safe, and relatively low risk investments to you.
Often those are achieved by high profit margins and low debt. But it’s also necessary to look at valuation too.
Because if you buy overvalued assets there is a lower margin of safety. Which means the investment is riskier.
I want to buy assets that are undervalued in a best-case scenario. And at worst fairly valued.
Unfortunately, Beyond falls into the overvalued category…
Its current forward P/E is 667.
And I can’t value it based on its current P/E or P/CF because both net income and cash flow are negative right now.
The forward P/E is sky high.
I look for companies to sell at ratios below 20 to consider the investment undervalued based on these metrics.
According to its current valuation its massively overvalued due to its low and negative profitability.
This is due to people buying its shares and speculating it will continue its rise higher due to the trend toward healthier eating.
I don’t recommend stocks based on speculation and hope.
Because of its low profits, negative cash flows, rampant speculation in its stock buying, and sky-high valuation I recommend you stay away from Beyond stock for now.
This thesis to avoid investing in Beyond Meat continued to play out after it released its most up to date quarterly earnings on November 9th, 2020.
Sales rose 2.7% in the year-to-year quarterly period to $94.4 million.
But it lost a lot more money on a net basis this quarter due to negative effects of the coronavirus.
Net income fell to negative $19.3 million in the year-to-year quarterly period compared to positive $4.1 million last year.
This fall in profits – combined with its huge overvaluation in July – sent shares falling 27.2% from their recent high of $194.95 per share on October 9th, 2020 to $141.84 per share as of this writing.
This illustrates why you need to be ultra careful when dealing with massive overvaluation.
One issue can send shares crashing.
And to top it off its stock is still massively overvalued.
As of this writing its P/E is 578.9.
Its P/CF is unreadable due to negative free cash flow in the last year.
And its forward P/E is 500.
This continued massive overvaluation makes owning its stock riskier… And means you should expect to earn lower returns owning it going forward.
And for these reasons, I still recommend you avoid its stock.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above