Description

Beyond Meat (BYND) is the largest producer of plant-based meat (PBM) products in the U.S. BYND was founded in 2009 by CEO Ethan Brown and launched into retail in 2012. BYND went public in May 2019, and is the largest domestic player in the PBM category. As of 2Q22, BYND’s products were in 183,000 outlets globally, including 78,000 U.S. retail stores, 41,000 U.S. foodservice locations, and 64,000 international retail & foodservice locations. Approximately 70% of sales are from retail & 30% from foodservice. BYND’s most popular item, Beyond Burger, was launched in 2016 & was the first plant-based burger in most retail stores.

BYND is facing a confluence of near-term & structural long-term negative factors that are likely to result in the company having to make substantial changes or face obsolescence in the next 5-10 years. Said another way, there are multiple ways to win:

1)  Competition is likely to drive continued market share loss as well funded incumbents & new entrants enter the space

2)  BYND is likely to be negatively impacted from consumers wallets getting squeezed & trading down to cheaper alternatives

3)  BYND, and most plant-based meat alternatives, are highly processed and we are learning are unhealthy. As consumers learn this, the category will likely suffer & fail to reach bullish consensus projections

BYND has a market cap of ~$1.5bn, has ~$1.1bn of debt (~$680mn of net debt), and is trading at ~3.6x FY23 EV/Sales. Data suggests a deterioration in trends 3Q QTD, and it appears highly likely they miss 2H22 and guide below for FY23. Our base case revenues are -15% below for FY23 and -25% below for FY24. Our base case GMs are ~450bps below in FY23/FY24 (note BYND had negative GM last qrtr). BYND is loss-making and cash burning, and we estimate that they will need to do a raise by end of 2023 / early 2024. Over the next 2 years, we believe it’s likely that after consistent misses, BYND will trade down more in-line with meat incumbents (e.g. TSN trades at ~0.5x sales). Ascribing 2x EV/Sales to our FY24 below consensus base case estimates yields a base case target of $7. The multiple assumes a 100% / 1x turn premium to what checks indicate someone would likely pay for the business in an acquisition (~1x sales) when trends stop declining (convos indicate that it’s unlikely someone buys when sales are declining).

 1.      Competition is likely to drive continued market share loss as well funded incumbents & new entrants enter the space

Competition will likely continue to erode BYND’s market share as they do not have any defensible patents & there are minimal to now barriers to entry. There are many well-funded incumbents that are releasing competing products. And BYND’s partnerships have been failing.

When Impossible & Beyond Meat pioneered the plant-based meat (PBM) alternatives, it quickly became a very hyped category that was expected to rapidly take share from traditional meat. Unlike the Boca burgers of old, this stuff actually tasted similar to real meat. It was marketed as being healthier for you, and more ethical. Not only was it healthier, but it had a great environmental footprint relative to animal protein.

Impossible was the first to develop, having created a blood-like meaty taste using leghemoglobin. This is patent protected by Impossible. Per industry conversations, BYND copied Impossible (going as far as to steal the triangle flag logo on the packaging), but couldn’t use leghemoglobin, so they used beet juice. BYND did a land grab, and focused on selling into retail and saw a substantial amount of early success. Now the partnership & retail wins have largely all happened. They have or have had partnerships with most major QSRs, and they aren’t going well. And they are in nearly all grocery stores, yet sales have stalled and core sales have been declining.

Mgmt got a pass on weaker trends due to COVID, but since then trends have continued to deteriorate, with mgmt. giving a slew of excuses. Mgmt gas blamed weak performance for consumers making fewer trips to grocery stores, trying fewer new items, and being less interested in healthy eating right now. Now they are beginning to blame the macro environment.

Meanwhile, several competitors have launched, or announced new products. Tyson, Applegate Farms, & Morningstar Foods are launching own private label plant based meat. Dunkin Donuts & Tim Hortons had a partnership that were de-listed. And Taco Bell announced its launching its own plant-based meat product, despite having a partnership with BYND.

BYND has a patent, but industry convos indicate that it is not defensible because it is far too broad. Definitionally, most plant-based meat competitors are encroaching on the patent, but since it is too broad, BYND is unable to pursue. Unlike Impossible, with their patented leghemoglobin, formers have shared some variation on “everything in their burger is super easy to replicate.” There are little to no sustainable barriers to entry in the business, and pricing and market share are likely to continue being eroded by new entrants. As illustrated below, market share has been deteriorating over the last year, and core sales have turned sharply negative.

2.      BYND is likely to be negatively impacted from consumers wallets getting squeezed & trading down to cheaper alternatives

Near-term, BYND is likely to be negatively impacted from its consumer base getting squeezed, and as a result trading down to less expensive alternatives. BYND is priced at a ~200% premium to traditional meat. We are seeing increasing evidence of trade-down behavior as the meat alternative category has been losing share to fresh meat this year.

3.    BYND, and most plant-based meat alternatives, are highly processed and we are learning are very unhealthy. As consumers learn this, the category will likely suffer & fail to reach bullish consensus projections

Longer-term, the existential threat the company faces is that it markets a healthy food that is actually unhealthy. A quick background overview of the health research.

In 2006 there was a laboratory breakthrough that allowed us to test and measure the complex layers of our gut microbiome. Up to that point, we knew of approximately 200 species of bacteria in the human gut. Quickly after the breakthrough, we identified fifteen thousand species, and now there are estimates of thirty-six thousand. Despite the new testing capabilities, we didn’t learn a lot regarding impacts to human health until the American Gut Project in 2012, the largest and most diverse study of microbes and microbiomes of the industrialized world. In the years that followed, we learned that the single worst category of foods for health is not dairy or meat, rather it’s highly processed foods. Highly processed foods dramatically suppress microbial diversity and increase inflammatory bacteria. Every 10% increase in consumption of highly processed foods is associated with more than a 10% increased risk of developing cancer & a 14% chance of an early death.  70% of the immune system lives in the gut, and many several neurotransmitters like serotonin are produced by the gut (over 90% of serotonin & 50% of dopamine are produced by the gut). Also, hormones like androgen production is mediated by the gut microbiome.

What we have learned, and are still learning, is that highly processed foods are incredibly unhealthy. While we have learned that meat promotes a number of destructive microbes while killing beneficial microbes, the impact pales in comparison to highly processed foods. The development and proliferation of processed foods has been tied to many modern day diseases, including cancer, diabetes, heart disease, and Alzheimer’s. Beyond Meat is highly processed, and even uses some additives that have been shown to reduce microbial diversity, induce inflammation, and promote obesity and colitis in mice. Beyond Meat markets itself as a healthier alternative to meat, but it is actually far unhealthier. It is becoming more common for Beyond Meat to be viewed as unhealthy “vegan junk food.” And as this knowledge becomes more widespread, health-conscious consumers and vegans (who over-index “healthy”) are increasingly unlikely to consume Beyond Meat.

 –      BYND has built itself a real brand, which likely has some value to a purchases. However, imo that’s all there is, brand value. The product itself has little to no barriers to entry, as we can see from the large number of new entrants. It is possible someone buys the asset, but industry convos suggest it would be at a ~1x EV/Sales price tag. Industry convos also suggest that there is unlikely to be a buyer while the asset is in decline, unless it was for an even lower price.

–     New partnerships may be announced. However, given the number of partnerships already announced or trialed (most of the U.S. QSR market), this appears less likely than BYND losing some of its existing partnerships.

–       Meme risk. BYND has high short interest (~35% of float) and is known & owned by retail.

Data suggests a deterioration in trends 3Q QTD, and it appears highly likely they miss 2H22 and guide below for FY23. Our base case revs are -15% below for FY23 and -25% below for FY24. Our base case GMs are ~450bps below in FY23/FY24. BYND is loss-making and cash burning, and we estimate that they will need to do a raise by end of 2023 / early 2024. Over the next 2 years, we believe it’s likely that after consistent misses, BYND will trade down more in-line with meat incumbents (e.g. TSN trades at ~0.5x sales).

Base Case:

–       Assumes retail growth recovers from -3% y/y in 2Q to +3% y/y in 2H, +4% y/y in FY23 & +1% y/y in FY24.

–       Assumes no additional partnerships are lost or gained. Assumes a recovery from +2% y/y in 2Q to +10% y/y in 2H22, +16% y/y in FY23 & +10% y/y in FY24.

–       GMs recover from 2% in FY23 to 12% in FY23 (-440bps below consensus) & 18% in FY24 (-470bps below consensus).

–       Assumes about ~400bps of SG&A leverage per year, yielding FY23/24 EBITDA -10%/-20% below.

–      Ascribing 2x EV/Sales on our FY24 below consensus base case estimates yields a base case target of $7. The multiple assumes a 1x turn premium to what checks indicate someone would likely pay for the business in an acquisition (~1x sales) when trends stop declining (convos indicate that it’s unlikely someone buys when sales are declining).

Catalyst

Earning misses & they're likely going to have to raise money in the next 1-2 years.