Highlights (Stock popped 20% on 9th June)
On 9th June, when this article was written, the stock popped 20% higher when no positive catalysts/news was witnessed other than that shorts was squeezed along with unrelated companies like Carvana and Vroot. This prompted me to investigate further on this potential mispricing. In this article, I will highlight some critical negative short-term and long-term thesis while concurrently sharing the qualitative and quantitative details. This plant based burger article is written before the beyond meat sausage event.
Introduction
Beyond Meat IPO'ed at a price-high of 230 and a hefty price-to-sales valuation of 50 to 100 before the price crashed abruptly in 2021, exacerbated by supply chains and inflation price events. What is the current state of affairs for the infamous plant-based meat company?
A) Historical Valuation
Beyond Meat Price to Sales Ratio
The profitability margin of the company is in the wreckage (Mar 2023), while the ship has half sunk in price since a long time back in March 2022. One saving grace of the ship is the price-to-sales ratio is at a record low (Mar 2023), stinking of value to the unsuspected swimmer digging for treasure under the sea. Nonetheless, the ship may be a lost cause already.
Beyond Meat Cash and Investment
All the bleeding liquidity from BYND is left with little meat (pun intended; at a record low).
Cash and Investment Accretive BYND
Retained earnings (previous cash flow from net income to distribute to shareholders as a dividend or for share buyback is at its 3-year low) leading to also a concurrent 52-week low in its Equity. In short, Cash and Equity are at their record low while liabilities remain high, and the company's quick & current ratios are not in fine shape. I'll explain more about the balance sheet later at the end of this article
Content
Elaborating on the qualitative items attributed to the macro and micro views of the company. To illustrate, the CPI for food has increased dramatically by 5% from the year 2022 to Apr 2023; this led to two other points I will propose in this brief introduction.
1) Household penetration of plant-based food remains low partially due to the higher CPI and price per pound of meat.
2) Price elasticity: Despite price increases for meat supply and raw material cases, price did not translate well enough for consumers.
1) Key sales metric: Household penetration
Household Penetration for Beyond Meat
The plant-based meat category - The Good Food Institute
What is this unit velocity spoken of? It is the rate of sales, A.K.A the speed of an item turnover on the shelf. Compared to last year, plant-based meat sells off slower than prior. My main point to elucidate here is? Household penetration has declined in general compared to previous years depicting a lack of sales & market penetration by BYND (later), while the price per pound has increased in general (later)
2) Plant Based Food Consumer Demographics
Higher-educated and higher-income individuals are typically correlated with more health-conscious individuals. Hence, they are expected to spend more on premium consumer items, namely, Plant-based meat, despite the rising cost economy (high inflation) supporting the price-inelasticity hypothesis.
Willingness to buy plant based burger at different price point
However, contrary to the above argument, a wide-scale survey highlighted the unwillingness to spend on plant-based burgers even when the price ranges around 3 Euro above or below the median price (also 3 Euro) of a patty-based burger, regardless of the va
Consumer think plant-based food is too expensive. Likewise, when the same study questioned the consequences of higher-cost living, most prioritized saving money over ethical purchases. The question is, then, is this vegan burger truly price-inelastic? We will thoroughly investigate the balance sheet and financial statement in the later halves of the segment.
Plant based meat versus animal based price per weight comparison
Beef cattle and the pork cycle has been declining, meaning beef and pork inventory is strongly contracting. At the same time, prices remain, meaning beef and pork inventory is experiencing a solid contraction while prices remain at their high. However, these cattle and pork prices have yet to be successfully passed down to consumers despite the sticky inflation. As shown above, minimally, beef price traded at a 21% premium to plant-based beef despite the ridiculous cattle price as of the current quote.
Plant-based meat's main raw material/ingredient is in its pea content which BYND guidance has posted a 40M inventory take-up from its latest 10-K statement. Imagine this compared to the scale of its 200M (The year 2023 inventory) and its 402M annual revenue. Besides, BYND's cash flow is running out, left behind by 258M in the latest quarter revelation. Pea prices have risen significantly from the year 2020 till now, denoting a higher raw material price for BYND plant-based meat. Yet. the prices have also not navigated downwards to the consumers thus far, as demonstrated by the lack of gross margin in its revenue (later). Since the prices have not passed down to consumers significantly for the animal- and plant-based types of meat, Plant-based meat remains adamantly high at a pretty premium. Therefore we can probably infer more consumers are still going to purchase animal-based meat when also comparing the willingness of consumers to purchase the two types of meat aforementioned.
Popular cell-based meats, namely, chicken to Kobe beef, can be grown with little muscle cells and fat removed in a biopsy-like procedure from a live animal. According to a recent report from the Good Food Institute, "156 companies now produce cultivated meat and seafood worldwide, up from a few dozen in 2020. Nearly $3 billion has been invested in these startups, with about a third committed in 2022." This is undoubtedly a shock to companies beyond meat, detrimental to its only competitive edge with the climate-friendly industry.
BYND Financial Statement and Balance Sheet
When I inspected the past transcripts and guidance, I realized the management theme of the three pillars, which was always emphasized and reiterated. "These pillars are: one, we would apply a laser focus to margin expansion and OpEx reduction through the use of lean value streams across our beef, pork, and poultry platforms; two, we will place emphasis on cash flow accretive inventory management with a near-term focus on profit dollars versus maximizing the percent margin; and three, we would prioritize opportunities to support near-term growth and consumer trial and adoption, appropriately balancing and streamline activities in support of our most valuable long-term opportunities." Let me attempt to counter-argue their forward supports/pillars one by one.
1)"Margin expansion and Opex reduction through lean value streams across poultry platforms."
OPEX Beyond Meat
As can be seen, the revenue has been on a steady decline since the quarter after July-22, and the cost of revenue has gone up ever since. In the latest quarter, the proportion of COGS rebounded to a low of 93%; at first glance, this reassured investors. Digging into SEC also discovered that reduced manufacturing costs, excluding depreciation, positively impacted gross profit and gross margin. Still, it was somewhat offset by lower net revenues per pound and higher inventory reserves, which increased prices per pound.
As can be seen, the revenue has been on a steady decline since the quarter after July-22, and the cost of revenue has gone up ever since. In the latest quarter, the proportion of COGS rebounded to a low of 93%; at first glance, this reassured investors. Digging into SEC also discovered that reduced manufacturing costs, excluding depreciation, positively impacted gross profit and gross margin. Still, it was somewhat offset by lower net revenues per pound and higher inventory reserves, which increased prices per pound.
Beyond Meat COGS
However, on closer perusal, the Revenue to Inventory and Inventory Turnover ratio is near the record low, indicating a high inventory bulking in the backlog. Subsequently, the future quarters will be distressed as a heavy inventory backlog will compress forward revenue and increase gross damage per goods. Rich inventory will also lead to excess and obsolete inventory being written off. To correlate this phenomenon with a stock target price reduction, if you look at the Jul-22 quarter, it was a relatively good quarter due to its speedy inventory turnover, which may have led to the massive surge in price during the period. To corroborate with information from SEC, BYND wrote off $22.6 million (record damage), $12.5 million, and $10.8 million in obsolete inventories for the years ended December 31, 2022, 2021, and 2020, respectively. Furthermore, the Company recorded $1.0 million, $0.8 million, and $0, respectively, in the write-down of inventory to lower cost or net realizable value on December 31, 2022, 2021, and 2020.
Risks There are apparent contrarian views to this short/sell thesis. Cell-based meat has nutritional benefits renowned for being climate-friendly. Despite incoming cell-based meat being the next fad and the in-thing to be yelling across the street, plant-based meats have the edge of being vegan/vegetarian favorites as cell-based meat is still part and portion of meat derived from an animal source. Another qualitative aspect indicative of danger is cell-based meats are less scalable due to the stringent and conducive laboratory conditions to confer the growth of this peculiar meat. As for the quantitative aspect of the company, I reiterate the ravaging damage brought by the tides of OPEX savings, namely, scrimping on R&D and SG&A. Nonetheless, the management is all-out to salvage the margin, which may hold the fortress for the dire company. A desperate time calls for desperate measures indeed.
Conclusion
BYND is demonstrated to be a terrible investment thus far. I extrapolate the results to continue further due to 1) Price in-elasticity hype of vegan food was hype and will continue, 2) The counterarguments made for its cost-saving and revenue-generating measures, 3) Macro tailwind by inflation, CPI, Pea (Raw material price) for vegan/vegetarian based meat. 4) Newer competition from cell-based meat. This is not a simple business and a niche one, but eventually, valuation and the numbers are possibly marked by an ill omen.
Disclaimer: This website is not financial advice and is merely for entertainment and reading purposes.
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