Beyond Meat (NASDAQ: BYND) – expected market cap as of 03/05/2019: $1.5b

Introduction

On May 2nd, Beyond Meat, producer of plant-based meat substitutes, went public on the NASDAQ. The firm priced its initial public stock offering at 25$ per share, after strong demand encouraged the company to raise the price range from 19$ – 21$ per share to 23$ – 25$ per share. At the current market valuation of $1.5b, Beyond Meat would raise $240.6m, which will be invested primarily into manufacturing facilities, research as well as sales and marketing.

About Beyond Meat

Beyond Meat was founded in 2009 by Ethan Brown and first sold its products in the United States in 2013, after receiving venture funding from Kleiner Perkins Caufield & Byers, Tyson Foods and numerous other entities. The company nowadays offers the “Beyond Burger”, “Beyond Sausage” and “Beyond Beef Crumbles”, which act as plant-based alternatives to the respective meats. These products are also specifically designed to appear, taste, and be cooked using the same traditional procedures.

Although, individuals may expect Beyond Meat to market itself as a niche company for the vegetarian and vegan customer base, the firm broadens its spectrum to all meat-eaters by selling products in the meat sections of grocery stores and avoiding veggie burger labels. The company’s strategy has proven to be successful, as 93% of customers that bought a “Beyond Burger” likewise purchased animal meat products. Furthermore, the business actively wishes to raise awareness about human health, climate change, resource conservation and animal welfare through its continuous marketing campaigns. The appeal to a broad range of customers has led Beyond Meat to reach enormous sales, even though the firm faces high rivalry from smaller producers and deep-pocketed competitors. Nevertheless, the shortage in the supply of pea protein, due to a lack of suppliers, may pose a threat to the sustainability of the firm.

The company has approximately 30,000 distribution points and is primarily based in the United States. The renowned grocery stores Target and Walmart have already started offering Beyond Meat products and the Yankee Stadium and Dodger Stadium have also expressed interest. The company earns 58% of its revenue from grocery stores and other retail channels, while 42% come from restaurant and foodservice customers. Beyond Meat’s revenue climbed sharply to $87.9m in the 2018 fiscal year, representing a 170% increase. The “Beyond Burger”, which is sold in
15,000 – 17,000 grocery stores, made up most of the aforementioned figure. However, the company’s growth is accompanied by rising losses. For example, net operating loss after tax increased from $13m in the 2017 fiscal year to $19m in the 2018 fiscal year. Despite the relatively small production scale, the company, according to research reports, has already begun to experience economies of scale as it recently tripled its capacity. Gross margins in the 2018 fiscal year were roughly 20%, surpassing the largest meat producer Tyson Foods. The following graphics offer a visual representation of Beyond Meat’s revenue/loss pattern and gross margin.


Beyond Meat’s Business Model

Beyond Meat is an American food company selling a range of products across the three core
plant-based product platforms of beef, pork and poultry. These products are offered in
ready-to-cook formats, such as the “Beyond Burger” and “Beyond Sausage”, which are designed to respectively look, cook and taste like traditional beef and pork sausage. Alternatively, Beyond Meat also offers the “Beyond Beef Crumbles”, which are a ready-to-heat products, designed to look and taste like minced or ground beef.

Beyond Meat is expecting alternative meats to become a multibillion-dollar market and to take significant share from the $1.4tn global market for meat. The company is planning to mimic the strategies employed by businesses operating in the plant-based dairy industry, which comprises approximately 13% of the total dairy milk industry. Boosting the plant-based meat category to the same level would create a market of $35bn in the United States alone. Beyond Meat has developed a strong strategy to pursue rapid growth within the following distribution channels:

  • Retail: Beyond Meat aims to quickly expand its market position as the first plant-based meat substitutes producer. It has a strong presence at leading food retailers, including Albertsons, Kroger, Wegmans and Whole Foods Market. As part of the strategy, Beyond Meat wants to increase sales at the existing distribution points as well as increase sales of new products, such as the “Beyond Sausage”. The company also expects to grow its United States retail distribution network by establishing commercial relationships with new customers.
  • Restaurant and Foodservice: The firm has established several partnerships with selected restaurant and foodservice chains, including BurgerFi, Bareburger, Carl’s Jr., Del Taco, TGI Fridays and A&W Canada. Beyond Meat plans to continue to aggressively expand its network of restaurant and foodservice partners and the individual products are expected to launch at several prominent restaurants in 2019.
  • International: Beyond Meat believes that there exits a significant demand for its products in Canada and Europe across retail, restaurant and foodservice channels. Thus, the firm intends to increase production capacity within the aforementioned regions in 2019. In addition, the company has already established additional relationships with distributors in other geographies, including Australia, Israel, Hong Kong, South Korea, South Africa and parts of the Middle East.

Beyond Meat has experienced strong sales growth over the past few years, increasing revenues from $16.2m in 2016 to $87.9m in 2018 (133% CAGR). However, the company is still loss-making and its business model shows two main pitfalls.

First, the main ingredient in Beyond Meat’s products is pea protein, an extract of yellow peas, which it currently sourced from Canada and France. The protein represented 79% of revenue in the first nine months of 2018. Two suppliers deliver pea protein to the firm and Beyond Meat has already suffered supply interruptions due to delayed delivery. Furthermore, the price of pea protein is vulnerable to a range of factors, ranging from poor harvesting conditions caused by bad weather to natural disasters, as well as changing economic conditions and the number of farms that are willing to grow the protein. Beyond Meat attempts to overcome these problems by diversifying its supply chain and locking in prices through long-term contracts.

Second, a significant amount of Beyond Meat’s revenues stems from products that are made in facilities owned by co-manufacturers, including CLW Foods and FLP Foods. However, the company does not hold written contracts with either company. Therefore, the relationships could change or end at any time. In addition, Beyond Meat is also embroiled in litigation with a former co-manufacturer named Don Lee Farms. That company filed a suit against Beyond Meat in California in 2017, claiming its contract was wrongfully terminated and that the company shared trade secrets with subsequent co-manufactures.

Lastly, Beyond Meat is operating in a highly competitive environment. The company competes with other plant-based protein makers, including Boca Foods, Field Roast Grain Meat, Gardein, Impossible Foods, Lightlife, Morningstar Farms, and Tofurky. Beyond Meat also faces rivalry from traditional meat companies, such as Cargill, Hormel Foods, JBS, Tyson Foods Inc and WH Group.

IPO Structure

The Initial Public Offering started at 8.75m shares, each valued at a range of $19 – $21, allowing Beyond Meat to raise an estimated $184m at a valuation of $1.2bn. Due to the strong appetite of investors for the company’s growth prospects, Beyond Meat managed to price 9.6m shares at $25 a piece, at the high end of increased price range of $23-$25. This helped raising $240.6m at a valuation of $1.5bn. Beyond Meat’s underwriters were granted a 30-day option to purchase up to 1.44m additional shares of common stock at the IPO price less of underwriting discounts and commissions. In addition, there exists a lock-up agreement of 180 days, which limits the offering, selling or exchanging of any amount of Beyond Meat’s stock by underwriters.

Total expenses for this offering, including registration, filing, listing and printing fees as well as legal and accounting expenses, yet excluding underwriting discounts and commission, amounted to approximately $4.8m.

IPO Rationale

Given that the World Trade Organization and numerous other international entities have started investigating the correlation between processed meat intake and cancer, and veganism gaining in popularity among millennials worldwide, the alternative meat category is expected to become a multibillion-dollar market in the upcoming years, eventually stealing a significant portion of the $1.4tn global market for meat.

Consumers are quickly moving away from beef and pork, on the grounds of a stronger environmental consciousness and effort to safeguard personal health conditions. Riding on the success of this recent flexitarian dietary trend, which recommends minimizing meat intake, Beyond Meat entered the capital markets, in an attempt to raise the necessary funds to finance the company’s long-term ambitious growth plans.

To meet the increasing demand for meat substitutes, the burger start-up planned to invest the IPO proceeds in research and development, sales, marketing and, above all, in manufacturing facilities. Through ad-hoc money injections in this latter field, Beyond Meat will try to mimic Nestlé’s strategy, according to which the Swiss corporation will start selling its own plant-based burgers called “Awesome Burgers”. According to Beyond Meat’s Chief Executive Officer and founder, Ethan Brown, the company’s operating expenses and CAPEX will grow substantially as a result of the implementation of the aforementioned strategy. The larger customer base and retention rate as well as stronger supplier and co-manufacturing relationships may counterbalance the rise in costs. Ethan Brown has also planned to hire new employees, enhance technology, and open manufacturing facilities in Hong Kong, broader Asia and Europe by 2020, in order to meet the growing interest of grocery and restaurant chains in the regions. Moreover, Ethan Brown’s visionary plans include a significant enlargement of existing distribution channels. This tactic would help the company to place products in the meat cases at grocery stores.

Ethan Brown himself recognized that the firm’s expansionary efforts, highlighted above, may eventually prove more expensive than forecasted, with the company being unsuccessful in sufficiently increasing revenues and margins to offset the higher-than-expected capital absorption. Furthermore, ever since foundation in 2009, Beyond Meat has never recorded any profit. These budgetary concerns exactly constitute the reason why, ahead of the IPO day, Ethan Brown was attempting to be optimistic about the firm’s market capitalization. The visionary plans undoubtedly require equity investors’ support.

Market Reaction

As mentioned earlier, as of Wednesday night, the company’s share price was settled at $25. The implied market value was therefore in line with Ethan Brown’s optimistic expectations. The following day, at 12:18 Eastern Time, Beyond Meat’s shares started trading on NASDAQat $46 price per share. In the early afternoon, shares soared, quickly building an optimistic momentum. Later in the afternoon, with a high of $72.95 and a low of $45.00, trading was paused, due to too high volatility. When trading resumed, Beyond Meat’s share price started growing again. By the end of the trading day, the closing price settled at $65.75, implying a $3.77bn market value, significantly beating expectations.

The trading patterns show that investors have digested the company’s temporarily lack of profits and need of capital very well. Moreover, investors presumably accepted the forecasted lack of dividends over the upcoming years, making stock gains the one and only source of returns, at least in the short-term. Investors have thus priced-in the company’s visionary attitude and environmental-friendly business plan. Among the supporters of the plan, NBA champion John Salley, declared he will not cash out his $5000 investment anytime soon, believing in the firm’s long-term horizon. He stated: “If you enjoy looking up and seeing blue skies, we need to take care of the planet; one of the ways is not eating any farm animal, or any animal anyway”.

With an overall first-day growth in share price of approximately 170% against the opening, Beyond Meat has been the strongest market debut of 2019 so far, according to analysts.

Underwriters

Goldman Sachs, J.P. Morgan and Credit Suisse acted as lead underwriters, whereas Bank of America Merrill Lynch, Jefferies and William Blair were assigned the role of co-managers.


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