Four years ago, Beyond Meat (NASDAQ:BYND) welcomed Tyson Foods (NYSE:TSN) as a minority investor. Beyond Meat CEO Ethan Brown believed the best way to grow the plant-based meat market was by partnering with, not opposing, entrenched animal-protein incumbents like Tyson.
This move was controversial at the time, motivating Brown to explain his rationale to stakeholders in a press release. But now, looking back, it's clear Tyson's investment helped his small company begin to realize its goal of becoming a mainstream food option.
Tyson exited its Beyond Meat investment in 2019. So should investors expect Beyond Meat to partner with another major animal-protein company in the near future? Not a chance. Brown has clearly stated his company is entering a new phase of its journey. He doesn't want to partner with Tyson -- he wants Beyond Meat to become a Tyson-caliber business, maybe even within the next decade.
The makings of a protein powerhouse
What does a Tyson-caliber company look like? Sifting through Tyson's segment results provides clues. The company has multiple animal protein categories (beef, pork, chicken) and international operations. The company also produces tons of food -- literally! According to its 2019 annual report, Tyson's facilities handle approximately 132,000 cows, 415,000 pigs, 39 million chickens, and 65 million pounds of prepared foods per week.
Needless to say, Beyond Meat has a long way to go to match this production. For perspective, the company sold just over 51 million pounds of plant-based products in 2019, up from just 15 million pounds in 2018. But even though it's still a long way off from reaching Tyson's scale, it's laying the foundation to become a global food powerhouse.
Laying the foundation
At the end of 2019, Beyond Meat's products were available in 65 countries. But this was primarily through exports, which isn't the long-term vision. The company needs manufacturing facilities in important regions, and it's made good progress in 2020. This year, in the Netherlands, it acquired a manufacturing facility and will open a co-manufacturing plant to facilitate Beyond Meat production and distribution throughout Europe. And it reached an agreement with local Chinese officials to open a facility near Shanghai to make its products more available in China and Asia.
Production is one thing -- distribution is another. Tyson products have wide distribution and are especially prominent at Walmart. In 2019, 17% of Tyson's sales came from the big-box retailer. For its part, Beyond Meat is expanding its distribution -- Walmart included. The company just announced it has increased its presence from 800 Walmart locations to 2,400 locations in an expanded deal. What's really great is, not only can Beyond Meat expand the distribution of existing products, but new products can instantly enjoy massive distribution upon launching by leveraging existing partners like Walmart.
Speaking of new products, Beyond Meat keeps working toward commercially available products in different categories. One can currently purchase beef and pork alternatives, but chicken remains elusive. Nevertheless, chicken is one of the company's main categories, and it's pursuing a perfected product for launch. On July 20, it began the third round of its ongoing trial of Beyond Fried Chicken at KFC locations (part of Yum! Brands) in California. At some point, you can expect Beyond Meat to launch a widely available chicken product.
The future value
Many investors believe Beyond Meat is an overvalued growth stock. And to be fair, it does look expensive by popular valuation metrics. Furthermore, consider that Beyond Meat's market capitalization is currently over $12 billion. Tyson's, by comparison, is around $22 billion. So Beyond Meat has half the market cap of Tyson but less than 10% of the latter's sales.
Beyond Meat management has said it wants to become a powerhouse like Tyson but hasn't officially put a timetable on this goal. However, let's suppose Beyond Meat grows its sales 10-fold over the next decade to match that of Tyson's. Would that imply a comparable valuation as well? Not necessarily.
Assuming Beyond Meat and Tyson had comparable sales and were growing at comparable rates, Wall Street could distinguish the values of these businesses based on profits. And here we suddenly see a vastly different opportunity warranting different valuations at maturity. In 2019, Beyond Meat's gross profit margin was 33%, while Tyson's was just 12%.
In other words, at maturity, Beyond Meat is likely capable of much higher profitability. This future isn't guaranteed, but the foundation is being laid in 2020. The potential to become a more profitable, Tyson-scale company is why investors are excited about Beyond Meat stock. The stock has more than doubled year to date, which won't represent typical annual returns. But Beyond Meat can certainly reward shareholders over the next decade if it can execute Brown's mission.