The bear market has been pretty brutal so far, and not even the safest stocks are enjoying any reprieve. Value investors are happy because there are several quality companies trading at a steep discount to their historic highs, but there are many stocks out there that are value traps. Beyond Meat (NASDAQ:BYND) is a classic example of one such value trap; it may look undervalued on paper, but it deserves that low valuation.
The rise and fall of plant-based meat substitutes
Beyond Meat is a company that makes plant-based meat substitutes. Its products contain no animal ingredients; they are meant to mimic meat for those who do not eat meat but miss their old favorite meat products. The products are made using pea protein which, if used correctly, has a similar texture and flavor to that of meat. Although the company is relatively young, it gained prominence during the pandemic.
Covid-19 spawned several trends as people were stuck at home more often, and one of these was a rise in vegetarianism and veganism. As demand for plant-based meat alternatives increased, sales soared and interest in Beyond Meat grew. Driving factors behind this included the price of meat rising rapidly and the belief that plant-based diets are healthier.
Data from the Good Food Institute and the Plant Based Foods Association shows that plant-based meat alternatives increased by 45%, and refrigerated plant-based meat sales increased by 75% in 2020.
However, this year is a different story. The sales of plant-based meat have been flat over the past two years. Against this backdrop, it is no surprise that Beyond Meat is struggling. It recently announced key departures from its executive team, cut 200 jobs and slashed its revenue guidance for the year.
Shares have declined since June 2021, but the worst is yet to come. The Los Angelesbased producer of plant-based meat substitutes is burning through cash at a rapid pace and has a substantial debt load to deal with as the top line declines.
Making sense of the latest news
Beyond Meat’s tanked nearly 10% on Friday after the company revealed even more bad news. However, this is not news for those who have been following the company’s fortunes.
In August, the plant-based meat producer announced it was reducing its workforce by 4%. But now, Beyond Meat is going a step further and is planning to slash 19% of its workforce, or about 200 employees. The company’s goal is to reach positive cash flow by mid-2023, and the cuts are supposed to help achieve this objective.
In addition, just weeks after his arrest in Arkansas, Doug Ramsey is no longer part of the company. Beyond Meat is not adding another chief operating officer; instead, the job will be added to the workload of Jonathan Nelson, the company’s senior vice president of operations.
Beyond Meat also announced that chief financial officer Philip Hardin is leaving the company after a two-week transition period. He will pursue other opportunities, according to a regulatory filing. Lubi Kutua, the vice president for financial planning and analysis, is now assuming Hardin’s role.
Beyond Meat also cut its full-year sales outlook. Due to economic uncertainty and foreign exchange headwinds, it now expects net revenue to be $400 million to $425 million instead of the previous range of $470 million to $520 million.
Altogether, these announcements did not favor the company in investors’ eyes. Once seen as a Wall Street darling, the stock lags behind its competitors. After a successful start at $25 per share, shares of Beyond Meat saw a sharp rise to more than $230 in 2019. However, the stock price has fallen by approximately 80% this year, and I believe it is in danger of falling further.
The plant-based meat category is becoming less popular. IRI data shows sales of cold plant-based meat alternatives have declined for the last 12 months ended Oct. 2. Beyond Meat has seen a 0.4% drop in revenue in the first half of this year. Clearly, things are not heading in the right direction.
Why it would be tough for Beyond Meat to make a comeback
Despite a tough year, many companies are still pushing forward. In the face of rising interest rates and high inflation, even those with less cash are finding ways to innovate. However, the issues Beyond Meat is suffering from are more fundamental.
For starters, Beyond Meat’s products are pricier than meat due to factors such as the smaller scale of the industry and the lack of the same government incentives enjoyed by the meat industry. Given the current inflationary environment, consumers with tight budgets are more likely to choose meat instead of plant-based meat alternatives.
In addition, Beyond Meat’s margins are in sharp decline. There are multiple contributing factors to this failure, but the launch of Beyond Meat Jerky probably had the most significant impact. The product was launched with much fanfare but didn’t take off – a sad turn of events for the company. To deal with the large inventory levels, the company sold products on liquidation channels, leading to a negative gross margin and an operating loss of $97 million in the second quarter.
Nevertheless, the worst might not be over. Beyond Meat reported an inventory of $255 million at the end of the second quarter, which is worrying compared to just $147.04 million in revenue. The company is in a difficult position, and its inventory levels are too high. This is a really bad situation as it’s failing to sell its products and facing daily losses of money.
Investors shouldn’t be too excited about Beyond Meat’s future in my opinion. Consumers are shifting their habits away from faux meat as they purchase less expensive products due to inflation. Even determined vegetarians and vegans can make cheaper meals without plant-based meat alternatives. At the same time, the company itself is struggling with its product portfolio. Although the stock has dropped this year, more pain is around the corner because of its poor financial state and lack of sufficient demand for its products.
This article first appeared on GuruFocus.