Not appealing despite massive slippage

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Beyond Meat (BYND) was a market favorite after its IPO in 2019. The problem is, Beyond isn’t becoming a consumer favorite. Sales growth slowed and gross margin shrunk while burning cash.

Macro events are against BYND; interest rates and pea protein prices are rising. BYND faces too many short-term risks with questionable long-term rewards. I view BYND as a sale.

Fragile operations

Revenue growth is slowing. 2021 saw only 14% revenue growth, compared to 37% and 239% for 2020 and 2019, respectively. BYND likes to brag about disrupting the $1.4 trillion meat market, but if sales growth has already slowed to 14%, it’s hard to see what’s disrupting.

On the bright side, BYND sees a higher total volume sold. BYND sold 16.6% more pounds of product in 2021 compared to 2020. The lower dollar sales growth is due to a lower price per pound at which products are sold as well as applied trade discounts.

In the US primary market, foodservice is growing while retail has contracted. The US market has been flat overall in terms of revenue growth, which means that all sales growth can be attributed to international markets.

Additionally, US consumer preferences are shifting away from retail and towards the restaurant segment. The US market had BYND products first; international markets will most likely also slow down once the initial taste test is done.

According to BYND, its gross margins fell to 25.2% for the full year from 30.1% the year before. Cost of goods sold increased 22.1%, partially attributable to COVID-19, which caused write-offs of $12.5 million and write-downs of $0.8 million.

On a per pound basis, cost of goods sold increased 4.7%, explaining most of the lower growth margin. Even without COVID-19, costs would have increased by 1%, resulting in a gross margin of 27.9%.

The cost of goods sold could soon explode due to a poor pea harvest and increased demand. Pea protein is the main ingredient in BYND products. The price of pea protein could rise by as much as 120%, devastating BYND. A higher pea protein price is almost guaranteed; the only question that remains is, how far will he go?

As you would expect from a growth-oriented company, BYND has significantly increased research and development by 112.3%. Increasing operational research and development makes sense, but it also puts additional financial pressure to perform in the short term.

BYND sees increased competition. Plant-based companies like Impossible Foods and more traditional companies like Kellogg are ramping up vegan alternatives. Increased competition will likely reduce BYND’s market share.

The problem of incoming money

BYND issued $1.15 billion of debt in the first quarter of 2021 to inject much-needed cash. The problem is that BYND is still operationally negative. BYND’s fourth quarter of 2021 recorded an operating cash outflow of $110.3 million, and the full year recorded an operating cash outflow of $301.4 million. These cash outflows are before any investment, which further reduced cash by $147.5 million for the year.

At the end of the year, BYND held $733.3 million in cash and cash equivalents. Assuming the level of cash outflows remains the same as in 2021, BYND has until the second quarter of 2023 before cash reserves are depleted again. At this point, BYND will need to raise additional funds through equity or additional debt.

BYND shares were initially priced at $25 but ended their first day of trading above $65. The market was enthusiastic about the listing, which led to a record price of over $222. The market is no longer enthusiastic, having fallen more than 40% since the start of the year.

If BYND’s price does not recover, any equity issuance to raise capital will result in significant dilution. BYND issued 63.4 million shares. To raise an additional $1 billion, 25 million shares at $40 would have to be issued. The issuance of these shares would dilute equity by 39%.

Debt is the most likely option when the stock price is so down. The macro-environment of rising interest rates is also unfavorable to BYND; many analysts expect rates of 2% by the end of 2022. In addition to the risk-free rate, BYND will likely have to pay a higher premium because it already holds the previously issued debt.

The Taking of Wall Street

As far as Wall Street is concerned, BYND gets a Hold rating based on one Buy, eight Holds and three Sell ratings given over the past three months.

Beyond Meat’s average stock price target of $51.90 implies 34.4% upside potential.

Final Thoughts

BYND has been portrayed as a disruptor, but it doesn’t disrupt. Slowing growth and shrinking margins in 2021 are a sign of prolonged weakness. The cash buffer from previously raised debt is rapidly shrinking, and BYND will most likely be tapped or diluted next year. I’m more bearish than the analyst consensus; I believe BYND is a sell.

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