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Better Buy: Beyond Meat vs. McDonald's

By James Brumley - Jan 22, 2021 at 7:45AM

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The plant-based meat substitute story is certainly sizzling right now, but given enough time and competition, investors may ask, "Where's the beef?"

On the surface, the dynamic makes sense. A relatively young company like Beyond Meat (BYND -7.30%) is being treated -- and priced -- like a tech start-up because it's the outfit making plant-based meat substitutes a mainstream product. McDonald's (MCD -0.54%) is a veteran respected titan of the fast-food business, but its growth potential is seemingly muted. The "meatless meat" name is clearly sporting the more exciting story, from an investor's perspective.

If there's only room in your portfolio for one of these stock picks, though, right now it's the fast-food giant. McDonald's competitive moat remains decidedly intact, but we can't safely say the same of Beyond Meat.

Not every castle has a great moat

You're reading that right -- McDonald's has a moat. Every company does, even if each moat's effectiveness varies from one name to the next.

Hands giving thumbs up and thumbs down

Image source: Getty Images.

Of course, these aren't traditional moats consisting of water surrounding a castle. Rather, these are philosophical moats that protect an organization from the competition.

Most moats come in the form of a cost-based barrier to newcomers considering entry into a new market. For instance, competitors to Netflix are finally materializing because it doesn't cost a great deal to deliver digital video via the internet -- particularly if that entertainment content has already been created for other distribution venues. Conversely, expanding an airline's route map is difficult because doing so is capital intensive. Not only are more passenger jets needed, but terminal space at airports must be acquired. Both require massive capital commitments.

And that's why a comparison of Beyond Meat and McDonald's is such an interesting exercise. Both stocks have their risk-adjusted pros and cons. A careful look at both companies, however, suggests Beyond Meat's moat may not be nearly as wide as many investors presently presume.

Here come the Beyond Meat copycats

Don't misread the message. Beyond Meat remains the current king of meatless meat, selling an estimated $410 million worth of the stuff in 2020. Its push past mere veggie burgers into faux sausage and steak strips is boosting the company's fortunes -- so much so that analysts are expecting the company to swing to a profit this year.

Smart partnerships are helping too. Beyond Meat's products are sold by Walmart and Kroger, while Yum Brands -- the name behind Taco Bell, KFC, and Pizza Hut -- offers its plant-based meat alternatives at many of its restaurants. McDonald's is even planning to debut a Beyond Meat sandwich sometime this year.

However, the fact of the matter is that the only real barrier to a competitor's entry into the plant-based meat substitute market is a lack of willingness to enter it. But new players in the sector are now finding that willingness in a big way.

Case(s) in point: Tyson Foods entered the meatless meat movement in 2019, and continues to widen its net. The company is rolling out a plant-based shrimp product co-created with New Wave Foods. Cargill got into the game in 2020, unveiling meatless hamburger patties and plant-based ground beef alternatives in February of last year. It's now adding to the menu with pea-based meat alternatives aimed at the European market. Indeed, even the world's biggest meat supplier -- Brazilian-based JBS -- is wading into alternative meat waters. You'll know it better by its plant-based meat substitute brand OZO. Then there's the budding competition from Beyond Meat's distribution partners. Kroger, for instance, now offers private label plant-based hamburger as well as its own plant-based chicken products.

And this is just a sample of fresh competition that's still finding its foothold.

In simplest terms, the proverbial low-hanging fruit that hasn't yet been picked by Beyond Meat is suddenly being picked by a lot of other players. Given analyst expectations for 50% revenue growth this year paired with a valuation of more than 20 times its trailing revenue, this stock currently poses a little too much risk relative to the potential reward.

McDonald's moat is its powerful brand name

Investors don't readily see it any better than consumers do, but McDonald's is a master of branding. Its top brass fully understands that every little detail counts.

Don't believe it? Chew on this: The restaurant chain is even picky about the typefaces it uses in its marketing and messaging, so much so that it's commissioned the creation of one. Similarly serious consideration is also given to its product packaging, restaurant paint colors, the look of remodeled stores, and more.

All of these could be mimicked by its rivals, of course, but the whole of these details is greater than the sum of its parts. This ultimately creates a moat no competitor can feasibly cross, which is the connection McDonald's has with its customers. The organization consistently rates among the world's most recognized and most valuable brands. Its rivals don't fare quite as well on this front.

Chalk it up to its age and its reach. McDonald's has now been a readily accessible burger joint to three generations of consumers, and with more than 36,000 peppered across the world, it's the single biggest brand in the business. It's going to be difficult for any other company to muscle its way onto McDonald's established turf, let alone wrestle away market share. Bolstering this dominance is annual advertising spending some estimates peg at around $1 billion per year after adding local franchisees' contribution to the effort. The company isn't likely to be outspent on marketing anytime soon.

The end result -- an indication of the brand's power -- is an operation that franchisees clamor to join despite its high costs. The company typically requires $500,000 worth of non-loan capital from would-be operators, and its requisite remodels and high franchise fees can make it particularly tough on franchisees. Yet, localized entrepreneurs are still lining up for their chance to work with the market leader. McDonald's is Franchise Times' highest-rated choice of franchise, for example, as it leaves operators with about $150,000 worth of annual profits per store, according to numbers from Bloomberg. That's much better than the typical yearly profits produced by rival fast-food restaurants, which means McDonald's is recruiting the best-of-the-best talent. This talent in turn is maintaining the company's wide moat.

McDonald's (MCD) is expected to drive slow but reliably steady sales and earnings growth through 2023.

Data source: Thomson Reuters. Chart by author. Revenue and operating cash flow figures are in millions of dollars.

Bottom line

Moats obviously aren't the only matter investors should be considering. Even with competing brands popping up, Beyond Meat is almost certainly driving double-digit-percentage sales growth right now that McDonald's may never produce again.

Their respective buffers are the biggest differentiator from an investor's point of view right now, however. The market seems to be pricing Beyond Meat as if it's better defended than it really is while underestimating the span of the McDonald's moat. Given that stock prices are relative to perceived risks, the fast-food giant is the better risk-adjusted pick of the two at this time just because it's more likely to meet analysts' expectations for the foreseeable future.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$243.72 (-0.54%) $-1.32
Beyond Meat Stock Quote
Beyond Meat
$28.96 (-7.30%) $-2.28

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