Investors often herd together when a hot story comes along, pushing stocks higher on nothing more than hope. That's exactly what happened with Beyond Meat (BYND 0.95%). Now that the stock has fallen out of favor and lost more than 90% of its peak valuation, is it time to jump in and buy some shares?
Here's why even the most aggressive investors might want to think twice before making that move.
A product line, not a company
At its core, Beyond Meat is a food maker. As such, it's part of an industry dominated by giants like General Mills (NYSE: GIS) and Kellogg (NYSE: K), among many others. Because of the nature of the business, size confers many advantages. For example, larger companies have more sway with the retailers that sell their wares. Industry giants also have larger advertising budgets, and they can spend more on research and development efforts. It's not that small companies can't exploit market niches, but they just don't have the ability to compete with the big boys when push comes to shove.
In fact, very often, large companies end up buying smaller competitors with exciting new products. A particularly interesting example of that comes from General Mills, which bought the Blue Buffalo pet food brand a few years ago. Some warned that it was paying too much, but General Mills was able to take the still modest size brand with a niche in pet-focused specialty stores and expand it, materially, in the mass market channel. To put a number on General Mill's success, between fiscal years 2018 and 2022, it achieved a compound annual growth rate of 15% with Blue Buffalo's revenues.
Blue Buffalo was doing well for itself before General Mills came along, but it probably couldn't have achieved that same success on its own. And that's where some information about Beyond Meat needs to be brought in.
Beyond Meat is struggling
For starters, Beyond Meat is not a profitable company. In fact, it hasn't made money in any year since its initial public offering (IPO) in late 2019. To be fair, it's not unusual for a young company focused on growing its business to lose money. However, the company's red ink has been getting worse, not better. If management can't figure out how to make money, even the most exciting food product won't last for long.
Adding to the dilemma here is that Beyond Meat's debt level has been on the upswing, as it looks to fund itself while it is losing money and trying to grow. Debt, in and of itself, is not a bad thing. However, when you combine a debt-heavy balance sheet with ongoing losses, you can quickly run into problems.
And that's why why investors should be paying keen attention to Beyond Meat's ability to cover its interest expenses. Right now the times-interest-earned ratio, which measures just that, is soundly in negative territory. That means earnings aren't high enough to pay the interest costs of its debt, let alone pay off any debt should it need to do so. Even the kindest lenders eventually want to get paid, so Beyond Meat is not in a particularly strong financial position right now, which helps explain at least part of the deep stock price decline.
A sign of the times
This is where Kellogg comes into the story because it happens to own the Morningstar Farms brand, which makes products that compete with Beyond Meat. At one point, when stocks like Beyond Meat were soaring, Kellogg thought it might spin off Morningstar Farms. It just announced that it was keeping the brand in-house, explaining that the profitable brand would get the most support for its growth if it remained in the Kellogg stable.
If industry giant Kellogg doesn't think profitable Morningstar Farms has what it takes to be a stand-alone company today, the deck seems like it is really stacked against tiny, money-losing Beyond Meat. In fact, given the ongoing red ink, which is leading to a dwindling level of cash on the balance sheet, there's a risk that this upstart could find itself facing a cash crunch. As such, the risks are high for investors unless Beyond Meat finds a buyer with material scale. However, that's a highly uncertain outcome that isn't worth betting on unless you have nerves of steel.
