In a closely fought battle with sausage roll-maker Greggs (GRG), US meat-free company Beyond Meat (BYND) is the victor in our “Veganuary” stock of the week poll. Many people, - whether for health/diet reasons (lockdown has not been kind to some waistlines) or to take an ethical stance - decide to go vegan for a month of the year. Regardless of whether you take the plunge yourself though, from an investment point of view it’s clear that food and nutrition are likely to be growing trends in the next 10 to 20 years.
Beyond Meat is one of first meat-free food companies to float in the US and produces plant-based meat alternatives that are meant to be indistinguishable from “the real thing” – the majority of its sales are burgers (64%), followed by sausages and chicken. “Beyond Meat seeks to replicate the look, cook, and taste of meat, and is targeted to omnivores and vegetarians alike,” say Morningstar analysts, who note that its products are sold in the meat aisle in direct competition with those products, rather than in the vegetarian or vegan section.
Beyond Meat’s 2019 IPO attracted more than the usual hype, especially as the shares rallied from $25 to nearly $66 on the first day, a 163% gain. Shares are now trading around $140, a mouth-watering return of 460% for those who got in at the IPO. Such a gain often means the shares become quickly overvalued by Morningstar metrics, but analyst Rebecca Scheuneman puts the fair value at $146. The company doesn’t have an economic moat yet, but is heading in the right direction. “Given the rapidly changing marketplace, we think it is too early to tell if Beyond’s first-mover advantage will result in a sustained market leadership position,” says Scheuneman.
McDonald's Holds the Key
Valuation-wise, a lot hinges on the firm's partnership with wide-moat McDonald’s (MCD), which Scheueneman says could be worth $180 million in annual sales for Beyond Meat and push its share price to $166. While McDonald’s has long had a vegetarian option – we’ve written before on the battle of the fast food giants to keep up with changing consumer tastes – a vegan burger is the long-awaited “game changer” for the food industry. The “McPlant” is due this year and Beyond Meat’s shares surged in November 2020 when the announcement was made as investors assumed that the meat-free company had sealed a deal with the burger behemoth. McDonald’s has since suggested that the burgers won’t carry the Beyond Meat branding – but as Morningstar’s Scheuneman says, “we think Beyond will be a primary supplier, as it helped to develop the product and few firms have enough capacity”.
Investors are excited about Beyond Meat because it’s a pioneer in “plant-based meat” (PBM), targeting US meat-eaters for the first time with products that are meant to taste the same as the alternative. But it’s not the first company foray into non-meat products: Morningstar Farms, a Kellogg's brand, (and no relation to us) has been on the market since 1975, Kraft Heinz has a “Boca Burger” and UK vegetarians will be familiar with Quorn, which is privately owned by Philippine company Monde Nissin.
Scheuneman says there are two key elements behind the promise of PBM: the environment and population growth, and both are important to ESG-minded investors. “We expect a primary growth driver to be the 20% of consumers willing to adjust their habits to benefit the environment, as Beyond’s products emit 90% less greenhouse gases, require 93% less land, 99% less water, and 46% less energy to produce than their meat equivalents.”
China and India both large populations and have consumers more willing to try meat alternatives than their US counterparts, according to research. “The products offer a great solution for China, which does not have enough arable land to feed its huge population, and a great fit for India’s large vegetarian population,” she says.
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