Beyond Meat (BYND -6.37%) manufactures "meat" products made from plant-based ingredients. The company's mission is to benefit the environment, human health, animal welfare, and natural resource consumption. This message resonates with an increasingly health-conscious, environmentally sensitive population.
Financial results and business milestones have been extremely positive
Beyond Meat's products first hit the shelves in 2013, and the company has grown rapidly ever since, reporting revenue of $91 million in the most recent quarter. It more than tripled last year's Q3 revenue. The company is also gaining traction outside grocery stores by establishing partnerships with major restaurant brands including McDonald's (MCD 0.35%), Yum! Brands (YUM 0.18%) Kentucky Fried Chicken, Dunkin' (DNKN), and Subway.
The pilot tests conducted with these partnerships have been welcomed as total successes by management, making the company very bullish about marketplace validation, demand, and the opportunity to roll out new distribution channels. Beyond is also enjoying momentum internationally.
Like many food companies, Beyond Meat operates with a relatively narrow gross margin, which was 35.6% in the third quarter. Interestingly, the company's rapid scaling allowed it to achieve a quarterly net profit for the first time. Many companies that experience growth of this magnitude are unable to break even, with substantial investment in sales, marketing, logistics, production capacity, and corporate infrastructure. Explosive growth requires hiring, setting up new facilities, opening office space, product development, and customer engagement for branding and product awareness.
Enterprises in this phase are typically happy to forego profits and redeploy cash flows to support the business's future size. Operating losses and cash outflow complicate stock valuation since most metrics and intrinsic valuation methods are based on different measures of profitability. Beyond Meat is fairly uncommon because of the combination of its profitability alongside its 300% revenue growth.
Beyond shares are expensive, but does it matter?
It is nearly impossible to forecast earnings and cash flows for 2020 at this point, especially with potential changes in working capital impacting the latter. However, it is still important to connect valuation with fundamentals when applicable. Beyond's management is projecting revenues between $66 million to $76 million for the last quarter of the year. Annualizing that sales run-rate at a 3.88% operating margin, the company would generate annual profits of $11 million. Beyond Meat also delivered free cash flow of $2 million in Q3, despite using a significant chunk of cash to expand inventories by $18 million.
Even with a forecast of rapid growth in net earnings and free cash flow, the stock trades at a high multiple of those metrics, which is to be expected of a company in the growth stage. With a market cap of $4.73 billion, Beyond trades at a forward price-to-earnings multiple of 232. Given analysts' expectations about growth, the company's recent performance, and management's outlook, the stock's PEG ratio, which adjusts the P/E ratio for growth forecasts, is actually in a more reasonable range between one to two.
Obviously, the most apparent risk here is Beyond Meat's growth falling short of expectations. However, the company is enjoying market penetration through various channels, and it's starting to deliver profits. Investors who believe in the product and respect Beyond's moat as an early mover in its market will probably see some logic in the stock's speculative valuation. Continuation along the path laid out in the most recent quarter will certainly lead to price appreciation, assuming stable market conditions.
In the long-run, Beyond Meat may very well prove to succeed beyond any investors' expectations.