There's a disconnect between Beyond Meat's (BYND 3.65%) stock price and what's happening in the restaurant industry.
Restaurants have been hammered by the novel coronavirus pandemic. Many have shut down completely. Others are staying open for deliveries and take-out orders and are trying to make up the lost revenue that way. Because of all of this bad news, the market has killed many restaurant stocks.
Yet the market expects Beyond Meat, a supplier to restaurants, to continue its rapid growth? Its valuation is still sky-high even though its sales might actually go backward. This makes no sense.
Image source: Getty Images.
First-quarter numbers will be bad
Fully half of Beyond Meat's sales go to restaurants. This is a big problem for the stock in 2020, because so many restaurants are closed or limited due to COVID-19.
While some restaurants are trying to pivot to delivery and take-out options to stay afloat, there's no question that COVID-19 has done a lot of damage to this industry. Restaurants that aren't feeding as many people don't need as much food, so it should follow that the pain restaurants are feeling right now will be passed on to their suppliers, including Beyond Meat.
It's strange that Beyond Meat has not yanked its guidance or reduced its estimates for 2020. Aren't you seeing disruptions from your restaurant customers?
Granted, one of its competitors, Impossible Foods, for which almost 100% of sales are derived from the restaurant supply chain, said in an interview with FoodNavigator-USA on April 6, "thus far we have seen no fundamental disruptions to our supply chain due to COVID-19." But that, too, is ... um, strange. How can you say there are no "fundamental disruptions" in the restaurant supply chain? Have you tried getting food in a restaurant lately?
Impossible Foods is private, so it can say whatever it wants about its numbers. But Beyond Meat is a public company. If Beyond is seeing "no fundamental disruptions" on the restaurant side, it should say so in public. It is possible, too, that the company is making up the difference on the grocery store side. After all, people still have to eat. But it's disquieting to have a hyper-growth company say nothing about its restaurant sales while the restaurant industry is largely shut down.
The restaurant industry is in trouble -- just look at the stocks
Contrast what Beyond's stock has done in 2020, compared to how its buyers are doing. Some of Beyond's restaurant customers include McDonald's (MCD 1.01%), Dunkin' Brands (DNKN +0.00%), and Del Taco Restaurants (TACO +0.00%). Let's compare how all of these stocks have done so far in 2020.
| Stock | Share Price on Dec. 31, 2019 | Share Price on April 17, 2020 | Percentage Change |
|---|---|---|---|
| McDonald's | $197.61 | $186.10 | (5.8%) |
| Dunkin' Brands | $75.54 | $61.41 | (18.7%) |
| Del Taco Restaurants | $7.91 | $4.66 | (41%) |
| Beyond Meat | $75.60 | $76.91 | 1.7% |
Data source: Yahoo! Finance.
This doesn't include Beyond's massive run-up and subsequent drawdown between these two dates. With the stock down almost 40% off its February highs, shareholders no doubt feel punished already. And yet for the year, Beyond is actually up a bit. Is it fair to be just as optimistic about Beyond now as on New Year's Eve?
Or to put it another way, what will happen to the stock when the company lowers guidance? It's kind of crazy to think Beyond Meat's numbers are going to be excellent in 2020 while many of its buyers are in such trouble.
Even now, Beyond Meat is trading for more than 10 times its sales. While the company is currently unprofitable, some analysts are estimating profits in the future. And Beyond Meat is trading at 167 times those future earnings. That's a very high multiple. Consider that the company's sales and earnings estimates were made at the beginning of the year, prior to the outbreak of COVID-19. Does it make sense to assume this outbreak will have no effect on sales?
For most stocks, the bad news of COVID-19 has already been priced in by now, but I don't think that's fully happened here. While Beyond Meat's stock is certainly down off its highs, its current performance is no disaster. Apparently, the market is still expecting the company to meet its estimates going forward, even though it seems highly unlikely.
Unprofitability is dangerous in this environment
In bear markets, it's routine for unprofitable companies to get hit. That's why Del Taco has been slammed so hard but McDonald's is relatively unscathed. Del Taco has amazing food; some would say it's much better than the fare at McDonald's. But making money is different from making food, and McDonald's is quite good at the former. It's a dominant name with outstanding profit margins.
There's a lot of uncertainty around COVID-19. We don't know how long restaurants will remain closed. Many fast-food franchises could be doing fine, as those companies are quite used to take-out. Nonetheless, in this bearish environment, unprofitable restaurant stocks such as Del Taco have been hit a lot harder than cash machines such as McDonald's.
So far, Beyond Meat is unprofitable, with net margins of negative 4%. That's not bad for a company that has been in hyper-growth mode since its initial public offering. And if you're a vegetarian and love the company's food as well as its long-term outlook, you might want to hold on through this mess.
On the other hand, it's not a bad idea to raise some cash here. The entire restaurant sector has seen radical changes to its immediate business prospects because of COVID-19. My expectation would be that Beyond Meat will have to revise its numbers at some point -- and thus disappoint the market. And when high-growth companies with high multiples disappoint on revenue, the result can be very bad for the stock.
If you're a long-term bull, you can buy more shares after the stock takes a hit -- and I suspect the hit is coming.
