Stocks/International

Lyn Alden Schwartzer

Filtering Through the Noise to Find Value

Beyond Meat: Let's Look at Some Details

Beyond Meat (ticker: BYND), which sells a small number of vegan meat-like products, has been an incredibly successful IPO in recent months:

I haven’t discussed the stock much, but when it hit a peak on June 10th at a market capitalization of over $10 billion (over a hundred times 2018 sales of $88 million), I described the valuation as silly. The stock has sold off substantially since then as major investment banks also went public with statements about its high price, but still remains at a very high valuation.

Beyond Meat already has more than its fair share of expected catchy article titles on Seeking Alpha alone. They have articles such as, “Beyond Meat: Beyond Absurd”, “Beyond Meat: Beyond Overvalued”, “It’s Beyond Me How Beyond Meat is Trading at Nearly $90 Per Share”, “Beyond Meat is Now Beyond Ridiculous”, “Beyond Meat: More Like Beyond Overrated”, and “Beyond Meat: Beyond Unbelievable”.

Okay, we get it. Hopefully writers have gotten that joke out of their system by now.

I decided to write this article to look at some product details and a few points about valuation.

The Challenge of Health Claims

Beyond Meat claims that it improves human health. That’s a key reason why it’s so trendy.

However, nutritional science has been a notoriously difficult topic to study for a variety of reasons:

  • The human body is outrageously more complex than any machine people can make. We have barely scratched the surface of understanding it.
  • People are comically bad at reporting what they have eaten. The ingredients and the amounts.
  • It takes decades for nutritional outcomes to play themselves out for health. A study of a sufficient sample for decades is costly and takes a very long time to provide a conclusion.  Studies on mice and other shorter-lived creatures can accelerate it a bit, but until something is tested on a human it’s hard to say if we’ll react the same way.

So, nutritionists used to think people should avoid eggs due to high cholesterol content, and now most of them think they’re healthy and can actually improve a person’s cholesterol profile. Saturated fat got a bad reputation, but more recent studies show that it’s questionable whether it’s bad for you depending on what it is replaced with. A lot of people in the paleo and keto communities have referred to various studies and shown great personal results with a meat-heavy or fat-heavy diet. Margarine used to be considered a healthy alternative to butter, but now we understand that margarine was historically made out of trans fats; literally one of the worst things you could eat.

Mainstream health authorities (big associations, governments, accredited dieticians) tend to respond very slowly to new studies and facts about which foods are demonstrably healthy or unhealthy. On the other hand, alternative nutrition communities (paleo, keto, vegan, etc) tend to respond very quickly to new information, but perhaps too fast before the facts are settled, and tend to hype things up further than the facts allow. It’s truly a minefield when trying to figure out the healthiest way to eat.

The question of whether humans benefit from cutting meat out of their diet is far from settled. Many large studies show that unprocessed meat is not correlated with negative health outcomes, although processed meat is.

So, one of Beyond Meat’s core reasons to exist is questionable.

It is, however, much less stressful on the environment to eat plants than factory-farmed grain-fed meat. Vegan meat alternatives have that strongly in their favor. The environmental comparison to high-quality grass-fed meat is complicated, however, and far from settled.  

Beyond Meat: Product Analysis

I’ve been a fitness junkie all my life. I spent 12 years doing competitive mixed martial arts, continue to exercise frequently, have experimented with a variety of different ways of eating including doing blood test results of myself to log the results, had a long 6-year run as a strict vegetarian at one point, read the detailed ingredient list on any food product I buy, eat very little processed food, and try to be mindful about my environmental impact.

So, I’m well within the target audience that Beyond Meat is aiming for. Unfortunately, some of the ingredients in Beyond Meat make me unlikely to consume the product on a regular basis.

Photo Source: Kevin Surace

In particular, a lot of people, myself included, avoid sunflower oil and other industrial seed oils (soybean oil, safflower oil, corn oil, sunflower oil, etc).

Many oils and other cooking fats have been used for millennia, and they are easy to harvest. Aside from butter and lard, plant-based fats such as olive oil, avocado oil, and coconut oil can be cold pressed; a relatively simple process of squeezing the oil out of the plant. Humans have eaten them forever.

In the past century or two, high-heat chemical extraction has allowed scientists to extract oil from seeds. These oils have become staples in processed foods in recent decades due to how cheap they are to produce, and our consumption of them (especially soybean oil) has skyrocketed:

Chart Source

In addition to being processed at high heat that can cause breakdown of the fats (and thus a potentially inflammatory result on the human body), the ratio of omega-6 fatty acids to omega-3 fatty acids in these industrial oils are off the charts. Sunflower oil is one of the worst offenders by this metric; it has a 71-to-1 ratio of omega-6 to omega-3 fatty acids:

Humans and other apes traditionally ate something in the ballpark of a 5-to-1 ratio of omega-6 to omega-3 fatty acids or less. However, in the past few decades when we began consuming more of these cheap industrial oils, our ratio of omega-6 to omega-3 has increased to over 20-to-1.

Various studies have shown that this to our detriment. This older study, cited over 3,000 times since publication, found that:

“Several sources of information suggest that human beings evolved on a diet with a ratio of omega-6 to omega-3 essential fatty acids (EFA) of approximately 1 whereas in Western diets the ratio is 15/1-16.7/1. Western diets are deficient in omega-3 fatty acids, and have excessive amounts of omega-6 fatty acids compared with the diet on which human beings evolved and their genetic patterns were established. Excessive amounts of omega-6 polyunsaturated fatty acids (PUFA) and a very high omega-6/omega-3 ratio, as is found in today's Western diets, promote the pathogenesis of many diseases, including cardiovascular disease, cancer, and inflammatory and autoimmune diseases, whereas increased levels of omega-3 PUFA (a low omega-6/omega-3 ratio) exert suppressive effects. In the secondary prevention of cardiovascular disease, a ratio of 4/1 was associated with a 70% decrease in total mortality. A ratio of 2.5/1 reduced rectal cell proliferation in patients with colorectal cancer, whereas a ratio of 4/1 with the same amount of omega-3 PUFA had no effect. The lower omega-6/omega-3 ratio in women with breast cancer was associated with decreased risk. A ratio of 2-3/1 suppressed inflammation in patients with rheumatoid arthritis, and a ratio of 5/1 had a beneficial effect on patients with asthma, whereas a ratio of 10/1 had adverse consequences. These studies indicate that the optimal ratio may vary with the disease under consideration. This is consistent with the fact that chronic diseases are multigenic and multifactorial. Therefore, it is quite possible that the therapeutic dose of omega-3 fatty acids will depend on the degree of severity of disease resulting from the genetic predisposition. A lower ratio of omega-6/omega-3 fatty acids is more desirable in reducing the risk of many of the chronic diseases of high prevalence in Western societies, as well as in the developing countries, that are being exported to the rest of the world.

Similarly, many newer studies (like this one from last year), show similar results:

“Using long-chain omega-3s to suppress low-grade inflammation may benefit numerous chronic diseases such as rheumatoid arthritis, atherosclerosis, dyslipidaemia, diabetes, obesity and heart failure. The consumption of omega-6 seed oils may have the opposite effect.”

Using technology to extract, process, and concentrate individual molecules within foods for human consumption has risks if we eat far more of something than what is commonly found in nature. Scientists still have a lot to learn about the human body, and many people avoid sunflower oil and other cheap industrial seed oils that are in every Beyond Meat product.

Valuation Check

Fake meat products have been around for decades. Made with soy or other protein-rich sources of plant protein, most of them poorly mimic the taste and texture of meat and they have limited sales.

Over the past decade, Beyond Meat and Impossible Foods have developed meatless meat products that mimic the taste and texture of meat better than many older products and can reach a wider audience. Rather than catering just to vegetarians and vegans, these types of products can appeal to any health-conscious or environmentally-conscious person who might consider cutting meat out of their diet a few days a week without making much of a sacrifice.

Additionally, Beyond Meat products have fewer carbs than many older meat alternatives. In addition to fitting within a vegan diet, it can fit within a ketogenic diet (very low carb), which as Google Trends shows, has received a lot of attention lately:

Beyond Meat has meatless sausage, meatless burger patties, and meatless crumbles for use in tacos and other recipes. Barclays has estimated that the meatless meat industry could reach $140 billion in ten years, or about 10% of the $1.4 trillion global meat industry sales.  

That’s a high but not necessarily unrealistic number. If 100 million Americans (less than a third, especially in ten years) buy a $3-4 serving of meatless meat twice per week, that’s $30-40+ billion in annual sales. Extend that globally and $140 billion doesn’t seem impossible.

Beyond Meat had $16 million in revenue in 2016, $33 million in 2017, $88 million in 2018, and is expected to reach over $210 million in 2019. The growth is huge. It has two main sources of potential growth: increased consumer purchases at grocery stores, and adoption by various restaurant chains for a meatless version of their burger, pizza, or other product (like the Impossible Whopper at Burger King). The company is currently unprofitable, but its gross and operating margins continue to improve, and this type of company has a fairly straightforward path to profitability as it scales up. The balance sheet is great with more cash than debt.

We can imagine a few thought experiments for how Beyond Meat could look in ten years.

If the meatless meat market reaches $200 billion in a decade (higher than Barclays’ estimate), and Beyond Meat captures 10% of that, then their revenue would be $20 billion. If their net profit margin is 5% (roughly in line with Tyson Foods), then their annual net income would be $1 billion. Put a fairly high 25x P/E ratio on what would certainly be a slower-growing company by then, and you have a market cap of $25 billion. That’s about a 3x return from today’s valuation of $8.5 billion, assuming no share dilution.

If the meatless meat market reaches $100 billion in a decade (lower than Barclays’ estimate but still high), and Beyond Meat captures 5% of that due to increased competition, then their revenue would be $5 billion (which is 23x as high as estimated 2019 revenue). If their net profit margin is 5%, then their annual net income would be $250 million. A 25x P/E results in a market cap of a little over $6 billion, which would be a negative rate of return from today’s valuation of $8.5 billion.  

A company like this has a very broad range of potential outcomes, and the high valuation leaves no margin of safety. Impossible Foods is a major competitor with similar levels of hype. Huge companies like Nestle and Tyson are both entering the market as direct competitors. Existing veggie-meat brands like Boca Burger (owned by Kraft), Morningstar Farms (owned by Kellogg), and Tofurky might wake up and compete harder for a broader audience now that hype and awareness are higher.

Beyond Meat is only as good as its latest product, and has little moat to speak of. It does not have cost advantages or high switching costs, and will need to compete partially on price. All it has is its brand and know-how, and it currently is considered one of the top meat alternative products. Who knows what the competitive landscape will look like in 5-10 years, and which meat alternatives will be considered the tastiest or the healthiest.

For now, Beyond Meat's product has no place in my fridge and the stock has no place in my portfolio. Maybe if they were to remove their highly-processed oils, or their stock price were to get cut in half, I would be more interested.

All I can say is, tread carefully. 

Lyn Alden Schwartzer covers North American stocks and international equity ETFs with a focus on fundamental valuation. Her background is a blend of engineering and finance, and she uses a dispassionate long-term quantitative and qualitative approach to filter through the noise and find value in stocks and markets around the world.
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