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Stock Deconstruction

Why China distribution deals make Beyond Meat's share price appetising

Since the turn of the year, Beyond Meat’s [BYND] share price has risen 69.8% (through 16 July) and is 137.8% up on its March market sell-off low of $54. 

Beyond Meat’s share price has soared as meat-free products became surprise beneficiaries of the COVID-19 pandemic.

The sector saw a spike in sales driven by a combination of panic buying and reports that slaughterhouses were coronavirus hotpots. A meat shortage in the US encouraged people to buy alternatives and Beyond Meat’s share price saw the effect of this increased appetite.

The recent announcement of more distribution partnerships in China has also had Beyond Meat’s share price investors salivating at the prospect of a global expansion.

 

 

New wave

The meat-free alternatives space is a relatively young category. While Beyond Meat has several competitors — Impossible Foods, Hungry Planet, Perfect Day and Next Level Burger — it's currently the only public company.

The company debuted on the Nasdaq on 2 May 2019, priced at $25 per share. Beyond Meat’s share price doubled on its first day of trading to give it a valuation of more than $3bn.

The lack of competitors in the stock market make it hard to judge the company's performance as a meat-free food stock. However, it has performed better year-to-date (through 16 July) than all five FAANG stocks, for instance. Shares in Alphabet [GOOGL], Apple [AAPL], Facebook [FB], Netflix [NFLX] and Amazon [AMZN] climbed 10.7%, 28.6%, 14.9%, 59.9% and 58.06% respectively, in the same period.

 

What's got investors and traders hungry?

A major part of Beyond Meat's appeal is the engineering and science that has gone into replicating the taste and texture of real meat. The company has also been smart with its marketing and has never pushed itself as a vegan producer.

Why? Because the founders believe that their job isn't to persuade vegans and vegetarians to eat their products but to get meat-eaters to buy them.

This is resonating. Beyond Meat has announced a number of production distribution agreements as part of a big push into the Chinese market.

Back in April, the company began selling its products in the country through a partnership with Starbucks [SBUX], which had been looking to add sustainable options to its menu.

Since then, Beyond Meat has picked up the pace. It partnered with Sinodis — which distributes imported foods to China — to bring the Beyond Burger and Beyond Beef to the region. Following the announcement on 8 June, Beyond Meat’s share price closed up 21.67%. 

The company has also started selling some of its products via Alibaba-operated [BABA] retail stores. The news of this sent its share price up 5.7% on 1 July.

21.67%

Beyond Meat's share price rise on 8 June following news of China expansion

  

McDonald's ends trial of meatless burger

Expansion abroad has increased appetite for the Beyond Meat’s stock, but events closer to home are putting things in perspective.

McDonald's [MCD] recently brought a trial of its meatless burgers to an end in Canada without announcing whether it intended for the patties to be rolled out nationwide.

"Typically, if a test did well, the retailer wouldn't end it," Ken Goldman, an analyst at JPMorgan, noted during the company’s Q1 2020 earnings call in May. Ethan Brown, CEO of Beyond Meat, responded by saying there was no issue with McDonald's, but he couldn't guarantee that there will be a massive expansion.

The trial may yet result in the fast-food chain adding Beyond Meat burgers to its menu at Canadian outlets. However, the fallout from COVID-19 on the food service sector has been holding back progress on this front.

 

Food services suffer

For Q1 2020, Beyond Meat posted revenue of $97m, up 141% year-over-year. Retail revenue was up 4,944% year-on-year, and foodservice revenue was up 57%.

In the four-week period ending 22 March, stockpiling and stay-at-home orders drove profits up 249%.

$97million

Beyond Meat's Q1 2020 revenue - a 141% YoY rise

  

Despite the positive report, the company expects Q2 earnings to show a significant drop in food service revenue and sales for the three months to the end of June. After all, the impact of COVID-19 only really started to bite following the end of the first quarter.

As such, Beyond Meat has steered away from providing any guidance.

In a note to clients, Benjamin Theurer, an analyst at Barclays, suggests the "hit in [the food service] channel might be too high for the retail channel to fully offset”. According to The Street, Theurer reduced his rating for the stock from overweight to underweight and raised his price target from $100 to $115.

In a more bearish move, Arun Sundaram, an analyst at CFRA, has recommended the stock be sold and has given it a share price target of $95, according to Barron's.

"Shares of Beyond Meat have been excessively rewarded, in our view, from the dynamic playing out in the conventional meat space," Sundaram notes, referring to the shutdown of meat-processing plants that resulted in a halt in beef and pork production.

“Shares of Beyond Meat have been excessively rewarded, in our view, from the dynamic playing out in the conventional meat space” - Arun Sundaram, CFRA analyst

 

The caveat, he adds, is that the company is heavily reliant on foodservice and restaurant sales. According to Sundaram, 51% of sales last year were from this segment, which is "well above the exposure that most conventional meat processors and larger packaged peers have".

In the short-term, at least, the general consensus among analysts is that Beyond Meat’s share price isn't one to buy. MarketBeat data shows that of the 20 ratings available, nine are a sell, six a hold and just five a buy. As of 14 July, the average twelve-month price target is $101.83.

Beyond this year, Beyond Meat could see its share price rise further. The company is aiming for price parity with conventional meat by 2024.

Its high price point is currently a big hurdle, but by making its products more accessible, it should encourage more conscious consumers to make the switch to meat-free.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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