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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.
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Hormel (HRL)
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Kellogg (K)
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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.
Not good.
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 Beyonds 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.
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.
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