As the market surges to all-time highs, is it better to go with the exciting new disruptors, or the steady and dependable brand names? It's not an easy choice, as both types of highly popular companies are currently trading at or near all-time highs.
One new-age "excitement" stock is Beyond Meat (BYND -5.80%), which, despite a recent sell-off, is still up about 82% on the year.
Beyond Meat has posted some impressive gains in the retail/grocery segment, even as its sales to restaurants have plummeted amid the pandemic. One of those impressive retail/grocery outlets is Costco (COST 0.58%), which began selling Beyond Burgers in December of last year and just introduced Beyond Meatballs in Costcos nationwide this month.
For its part, Costco has also had a good year, up 31.2%, after logging impressive mid-teen same-store-sales growth, and issuing a new special dividend this fall.
But after each stock's delicious run, which is the better buy today? The hot new product, or the store where you can get that product the lowest price?
The case for Beyond Meat
Investors were surprised with a rare earnings miss from Beyond Meat in November, as its third quarter revenue only grew a paltry 2.7%. That's a stark contrast from the second quarter, which saw revenue surge 69%, even in the initial quarter of a global pandemic. The second quarter obviously saw restaurant revenues plunge, but that was more than offset by big-time refrigerator-stocking amid COVID at grocery stores. Yet as consumers ate up what they had bought in the second quarter, the retail segment decelerated from 192% in the June quarter to just 39% growth in the third quarter.
Management thinks that deceleration is a one-off attributed to the peculiar buying patterns around Covid, so it's not taking its foot off the gas just yet. CEO Ethan Brown noted:
We have not, however, blinked in our focus on the expanding long-term opportunity before us and continue to operate our business locked in on this exciting long-term growth trajectory. Rather than curtail activities in reaction to transitory macroeconomic conditions, we continue to invest in the pillars of our future growth, and in capabilities, infrastructure, and markets that support our global vision and provide the highest long-term return to our investors.
Beyond is living up to its word, as it continues to roll out new innovations. Since that report just one month ago, the company introduced two new updated versions of its signature Beyond Burger, its core product, launched Beyond minced pork in China, where it got regulatory approval ahead of rivals, and, as mentioned before, rolled out Beyond Meatballs to Costco.
Despite the past quarter's disappointment, management continues to see strength in key performance metrics like household penetration, repeat buying rates, and others. Importantly, management noted that Beyond Meat continues to outgrow the plant-based-meat category, which is still only a single-digits percentage of the global $1.4 trillion traditional meat industry. As long as Beyond maintains its share or grows it, the ascension of the plant-based category over time should propel long-term growth -- especially once restaurants get up and running again post-Covid.
The case for Costco
Of course, Beyond Meat's tantalizing upside is up against the stiff competition of Costco's dependable growth and established competitive advantages over retail rivals. As the world's leading membership-based discount club, Costco makes most of its profits purely from membership fees, and only makes marginal profit on the actual products and services it offers. It's pretty hard for any other non-membership retailer to compete with that.
Despite being a 44-year-old company, Costco is posting some heady growth numbers even in its middle age. Last quarter, revenue grew 16.7% on 15.4% comparable store sales growth and 86.4% growth in e-commerce sales. Those figures, along with $2.62 earnings per share, up 38% over the year-ago quarter, beat analyst expectations. Costco's renewal rate also held steady at an impressive 90.9% in the U.S. and Canada and 88.4% worldwide. At the beginning of the pandemic, it wasn't assured that Costco's mostly physical brick-and-mortar clubs would perform, but management's safety protocols and the consumer's need to stock up fueled Costco's growth. Costco has been methodically introducing e-commerce offerings where it can, recently buying its own logistics company, and appears to have found the right mix for its model.
The solid growth in memberships and revenues allowed Costco to pay shareholders a $10 special dividend in December, or about an extra 2.7% at today's stock price, on top of the company's regular 0.75% annual dividend. Costco pays out special dividends every so often, but this was the first since 2017 and its fourth in eight years.
Despite its current size and generous payout, Costco isn't done growing yet, either. The company opened eight new units in the past quarter, on top of the company's 796 total stores. Yet given that Costco just opened its first store in China in recent years to enormous interest, it appears the company can continue growing its store count by a low-mid single-digit percentage for the foreseeable future, with positive comparable sales.
Which to buy?
Beyond Meat is an expensive growth stock, trading around 21 times sales, and is pouring all of its profits into growth, so it's not profitable yet. Of course, Costco isn't exactly a value stock either, trading at over 40 times earnings, despite its already-large size.
Deciding between the two will likely come down to your age. For investors under 40, Beyond Meat is likely the better choice. It's currently the leader in plant-based meat -- a category that could grow 10x or more over the next few decades. However, that doesn't mean that Beyond Meat will necessarily be successful; in order to justify its valuation, it will have to fend off competition from large consumer packaged goods companies and private upstarts such as Impossible Foods. Additionally, there is other competition from new technologies that make actual meat out of animal cells, without having to use a living animal. A company named Eat Just actually just received approval in Singapore to sell its lab-grown chicken, so that's something to watch.
For more risk-off investors and older investors at or near retirement, Costco is definitely the pick. While the stock may not grow 30% every year, investors are getting a competitively advantaged consumer staples retailer that should prove resistant to recessions and pay a rising dividend.
Therefore, between Beyond Meat and Costco, younger investors should take a flyer on the hot new item; older, more conservative investors should buy the store itself.