Another Company Goes Beyond Meat

On today's Market Foolery, host Chris Hill chats with Motley Fool analyst Emily Flippen about today's biggest market moves. Tyson Foods (TSN 0.49%) announced that they're looking into some un-meat proteins, right on the heels of Beyond Meat's (BYND -0.47%) IPO and insane valuation run-up. Is meatless here to stay? Is a new industry on the horizon? Who's poised to win in a race to a less meaty world?

Also, earnings from SeaWorld (SEAS 0.45%) were lackluster, especially when you read between the lines. Planet Fitness (PLNT -1.18%), on the other hand, is making inspired use of some 225 empty Toys R Us and Sears locations, and it means good things for their future. Tune in to find out more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 7, 2019.

Chris Hill: It's Tuesday, May 7. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, Emily Flippen in the house. Thanks for being here!

Emily Flippen: It's great to be here!

Hill: We're going to talk entertainment, we're going to talk health and wellness. Let's start with one of my favorite topics, and that is, of course, food. Specifically Tyson Foods, which is the parent company of Hillshire Farms. They're in the meat business. Tyson Foods making headlines because they announced this summer they're going to roll out their own line of plant-based meat substitutes. I did not realize that Tyson Foods was an early investor in Beyond Meat. 

Flippen: They were an early investor in Beyond Meat, and eventually sold their stake because Beyond Meat said they didn't want a competitor invested in them. And it's really interesting that they chose to announce this development now, right after we've just seen the crazy week last week with Beyond Meat's IPO. I think at this point, investing into meat alternatives, especially when you're a company like Tyson, is just smart business.

Hill: We've talked before about the marijuana industry, and how, yes, we expect that industry to grow, but we're not sure what direction it's going in; yes, there will be some winners. The meat substitute industry seems almost like a no-brainer. 

Flippen: Seems like the marijuana industry? [laughs] 

Hill: No, I was going to say, more so than the marijuana industry -- and we'll get to what happened with Beyond Meat in a second. But I look at this, and I really don't see how this industry doesn't grow dramatically over the next 25 to 50 years. 

Flippen: Exactly. And when you look at actual meat, Tyson's core business, those products are really a commodity. They depend on supply. There's a lot of different variables that can disrupt that production. We're seeing a lot of that happening in China right now, both with pork and chicken. While that's a small part of Tyson, it's still notable, because it's acknowledging the fact that if there's a better, more sustainable, cheaper way we can give people protein, we should be exploring those alternatives. 

It's concerning to me not that Tyson's is getting into it, but the fact that they were such an early investor in Beyond Meat and have just now decided to start putting out their own products, that begs the question of, what were you doing for the past three years? 

Hill: On that point, it will be interesting to see, when they start to roll these out, what does that look like? Do they do it quietly? Do they make a big show of it? It may be, at that time, we start to get some more color from Tyson in terms of, "This is what we've been working on." Maybe not. 

Let's just recap the last seven or eight days for Beyond Meat. [laughs] Last week, they set their price range for their IPO at $19 to $21 a share. On Thursday, it goes public at $25. It pops 163% on the opening day, and today it's at $80. Now, keeping in mind everything I just said about how confident I am that this industry will grow, doesn't this seem a little insane for Beyond Meat? Do you look at Beyond Meat at this price right now, and think to yourself, "Yeah, I would buy it at 80," or do you think, "Wait a minute, I'm going to wait for this to come down"? 

Flippen: The problem is that we're anchoring to their initial IPO price. There's an argument to be said that maybe if it stays up at this price, they just horribly mispriced their IPO. They didn't understand market demand for their products. Right now, they're the only pure-play non-meat company on the market. Part of me thinks, wow, this has increased so much. It's a bubble. I mean, that's just waiting for a pullback. It's a company with widening losses, stiff competition not just from Tyson but from other competitors. So part of me thinks, yeah. But then I keep remembering -- I go out to eat, I see Beyond Meat everywhere. I see them in restaurants, grocery stores. And I see people love their product. And part of me thinks, yeah, this is an evolving trend that's going to be here for the long term. Whether or not Beyond Meat ends up being the big player in that field is to be determined, and I wouldn't buy in at today's prices. But I don't think it's completely crazy. 

Hill: Later this week, Uber is going to go public. I think most of us were surprised when they set their price range that it was lower than what we were expecting. I have to believe that what happened with Lyft's IPO impacted the price range for Uber. By the same token, Impossible Foods, which is a competitor of Beyond Meat, if they're not looking at going public, or if they weren't, they certainly are now. I have to believe that what happened with Beyond Meat's IPO bodes good things for Impossible Foods' IPO whenever that comes.

Flippen: It's just a good time for IPOs right now, too. The market's hot, people are excited. These are good companies that are doing good things in the world and demand a lot of brand name recognition. Whether or not that ends up being sustainable is to be seen. 

Hill: Let's move on to SeaWorld Entertainment. Mixed first quarter results. They posted a loss. Overall sales, though, were higher than expected, and they've strung together a few quarters here of growing attendance at their theme parks. 

Flippen: That's what they want you to focus on. They want you to focus on the 3.6% attendance growth and think, wow, people are still going to SeaWorld! It's not completely irrelevant! You'll notice that revenue is only up 1.6%. While traffic was increased about 3.6%, admission cost per ticket decreased 4.3%. What that tells me is that they're having to decrease their ticket prices faster in order to attract that audience; but that audience is not growing as fast as their ticket prices are decreasing. So even though they're doing all these cost-cutting initiatives, which are saving them on the bottom line a little bit, it's still an unprofitable company, and I still wonder about how low those ticket prices have to go in order to get that audience back up to the point where they're able to be profitable. All in all, it rubbed me the wrong way. 

They're investing a lot into trying to rebuild that brand. And it's costing them a lot. Capex increased 5%. That's more than their customer growth increase. I just don't see how what they're doing right now is sustainable, unless there really is some complete brand rehaul and something is making you go, "I need to go to SeaWorld right now!" There's really nothing doing that. 

Hill: Yeah, it really is hard to see how this company sustains growth. I was surprised to see -- and I was surprised at myself, because I thought, how have I missed this before? I notice whenever a restaurant company comes out with some limited-time offer. Applebee's has done a good job with this with drink specials. They've methodically grown their sales by saying, "Hey, for this month, we've got $1 Long Island iced teas," that sort of thing. SeaWorld, giving out free beer to boost attendance in the month of June. This is a promotion that they've done in the past, it was one of the things they talked about on the conference call. I just thought to myself, how have I missed that they're giving out free beer to try and get people into the parks?

Flippen: Maybe they should try Long Island iced teas, right? Maybe that's the next step for them. I don't think the beer's working as well as they expected it to. 

Hill: We've talked before about the bankruptcy of Toys R Us and Sears continuing to close locations. One of the questions that comes with these stories is, what's going to happen to all those locations? We got at least a partial answer this week because Planet Fitness announced they plan to open 225 gyms this year. A lot of those are going to be Toys R Us locations, and some Sears locations as well. Were you surprised at the number they're going to open? I was. I don't know the company as well as you do, but that struck me as a pretty large number. 

Flippen: Well, there's still about 80% of Americans who are un-gymed, if you will -- 

Hill: [laughs] Un-gymed?

Flippen: Un-gymed Americans, it's really a crisis in this country. Eighty percent of Americans don't belong to a gym. While it sounds like a lot -- 225 is a lot -- I still think to myself, there's a lot of room for expansion here. You'll notice that they're being really smart about the stores that they do pick up. Over three-fourths of Planet Fitness customers say they combine their gym visit with other shopping needs. So picking up these old Toys R Us locations, it's smart for them, because they're picking up the ones that are close to things like grocery stores or shopping malls, places that people would normally go. And these shopping places are excited to have Planet Fitness because this drives recurring weekly traffic. People go to the gym every single day, or at least a few times a week, at a minimum, vs. other shopping places, which is maybe a once every week, every two weeks type of visit. So it's really a good business. 

They're picking up this land for much cheaper than they would get it otherwise. And they're strategically placing them across the country. I think there's a lot of opportunity, despite this company's rock star growth up to this point, for them to continue to grow. 

Hill: Yeah. The stock has done very well. It's an important point you made that not only are they being very smart about these locations, they're keeping a very close watch on the money that they're spending; they're also clearly doing a great job of engagement once they get people in the door. They've had 12 straight years of same-store sales growth. That's super impressive when you consider the inherent challenge in running a gym is, we're going to get a bunch of new people in January because people are making those new year's resolutions to get more physically fit and they join a gym, then how do we keep them? Because it's great and natural to think that in January, but invariably, you're going to lose people. Clearly, Planet Fitness has figured out not just how to be smart about how they're spending their money on new locations, but they're also apparently very smart about keeping people in the door. 

Flippen: Exactly. I remember when Planet Fitness used to be a controversial company. People said what they were doing was taking advantage of lower-income people, the $10 a month charge, "What they're doing is charging such a small fee that people forget that they are even subscribed to a gym membership. They'll never go to the gym, they'll just keep paying this fee, what an abusive business model!" But in actuality, we're seeing, for exactly the metrics users mentioned, that what they're doing is they're changing the culture around gyms. These people who were subscribing to a gym and never going back weren't doing so because they didn't want to go to the gym; it was because going to the gym was not a fun thing for them to do. It was uncomfortable, it was hard and it was challenging. Planet Fitness is convenient, fun, you feel associated with both the brand and the other gym-goers. It's really a smart, minimalist business model that is succeeding really well. 

Hill: We always like it anytime we see a business that recognizes the challenges that they're facing. Years ago with Panera Bread, it was Ron Shaich coming out with the famous comment about the mosh pit, recognizing, "We do a good job producing good food. We do a terrible job for the in-store experience. We have to fix that." So, the fact that Planet Fitness recognizes, there certainly can be a culture problem at gyms, so, Planet Fitness attacking it head-on, saying, we're creating these, what they call "judgment free zones," and even using free pizza as a way to entice people -- but also to demonstrate like, yeah, we're not that kind of gym that's going to be super judgmental. Because who wants to know to that? 

Flippen: Exactly!

Hill: Emily Flippen, always good talking to you! Thanks for being here!

Flippen: Thanks again for having me!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!