Better Buy: Beyond Meat vs. Domino's Pizza

Shares of plant-based meat-substitute company Beyond Meat (BYND -0.47%) and the stock of Domino's Pizza (DPZ -0.08%) are both beating the market in 2020. But Wall Street wasn't keen on either company's most recent quarterly update, sending prices for both stocks down. Having pulled back some from 52-week highs, which of these two companies' stock is the better buy today?

While Beyond Meat is growing by leaps and bounds, its latest report raises an important long-term question that might make Domino's the better stock to buy by default. Here's why.

A Beyond Burger. Image source: Beyond Meat.

What just happened to plant-based growth?

Upon reporting its third-quarter results, Beyond Meat saw its stock sink. That's because shares of this company are priced with the expectation of rapid revenue growth, but it reported quarterly year-over-year sales growth of only 2.7%. Prior to crashing, the stock was trading at a price-to-sales valuation of around 25, which is very high. To support this valuation, there must be strong sales growth, which there wasn't.

Here's what is creating some hesitation to buy Beyond Meat stock right now: The company divides revenue into two categories. Its retail segment is for sales generated from outlets like grocery stores, while its food-service segment is for sales from restaurants and other partners. In the third quarter, retail sales surged 39% from the prior-year period, but food-service sales plummeted 41%. The reason for these opposing figures is tied to the adverse effects of the coronavirus pandemic.

This highlights a risk to Beyond Meat stock that's been discussed before. The company recognizes revenue when its products are delivered to retail and food-service outlets. It's gained many new partners in the past year, which is good. But when it gains a new partner, it immediately fills the new distribution channel. This looks great for sales in the short term as there's a sudden surge. But it's not a good indication of sustainability because investors can't tell how well products are selling through to the end customer.

Many restaurants demonstrated improving results during the past quarter. Assuming Beyond Meat's restaurant partners are already recovering, the big drop in Beyond Meat's food-service sales could indicate waning end-consumer demand. 

That said, this isn't a hopeless situation. Specifically, Beyond Meat's net revenue in the U.S. was still up 25% year over year in the quarter. Inside those results, U.S. food-service revenue was only down 11% -- the bigger drop came from international operations. Moreover, management noted on its conference call to discuss the third quarter that only about 33% of its U.S. food-service sales came from fast-food chains. The rest of its partners are hampered by coronavirus dining-room limitations, so perhaps end-consumer demand is still strong after all.

If Beyond Meat can continue gaining new distribution partners, launching new products, and opening in new international markets, this stock still has long-term multibagger potential. But, considering Beyond Meat stock carries a premium valuation even after its recent drop in price, it may be prudent to wait on the sidelines until there's better clarity on consumer demand. 

Image source: Domino's Pizza.

Domino's tough upcoming comparison

In contrast to Beyond Meat, there's no question whatsoever about consumer demand for Domino's Pizza. Same-store sales have increased in the U.S. for 38 consecutive quarters: That's almost 10 years of nonstop growth. Comps have increased internationally for 107 consecutive quarters. Not only that, but in its third quarter, Domino's posted a 17.5% comps increase in the U.S., its strongest gain of the decade.

To be clear, Domino's success in 2020 isn't a flash in the pan; it's earned its popularity among consumers. But its outsize success this year has been driven by the pandemic; delivery pizza is a convenient option right now. Its business won't disappear once life returns to normal in a post-pandemic world. But results in 2021 and 2022 might drop in comparison to 2020.

It's not clear how Wall Street would react in coming quarters if Domino's posts a year-over-year decline in business. It's clear though that the market didn't like Domino's third-quarter report, sending the stock 11% lower in October as a result. Specifically, investors didn't like the bottom-line results. Earnings per share were $2.49, while some analysts were expecting $2.73.

Here's why that negative reaction was overdone: During the quarter, Domino's had extra coronavirus-related expenses. Once we move past the pandemic, those costs go away, improving profits. In short, business is still good, and profits should come back in line with expectations in time. 

Investor takeaway

Domino's stock currently trades around 33 times trailing earnings. I won't argue the valuation is cheap, but it is in line with its five-year average. Given the company's strong demand, profitability, and relatively reasonable price, I'd buy Domino's Pizza stock today over Beyond Meat.