EDITOR'S NOTE
Below is a complimentary research note from our Restaurant analyst team. If you are an institutional investor interested in accessing our research email sales@hedgeye.com.
BYND is on the Hedgeye Best Ideas list as a SHORT
While the overall results were solid off a very low base and guidance was raised, the results will never be good enough to justify the valuation of BYND. It was a clear positive that BYND reported the first quarter of positive net income, better sales and margins. However, the need to invest in the brand and manufacturing capabilities will be important to stay ahead of the curve.
I won’t regurgitate the details of the call, but suggest some issues to consider on why this stock will make for a great SHORT:
A BRAND BUILT ON CELEBRITY ENDORSEMENTS?
One of the biggest issues I have with the bull case is the level of competition already in the space and from better capitalized companies than BYND. We are led to believe that BYND can compete better against these much larger companies because of the strength of the BYND brand. Importantly, the company cites the success of brand so far is because “we built it with some very famous consumers and users that are lending their name and their voice to our brand, whether it's the many professional athletes or the celebrities that work with us” Can you really trust a celebrity or a professional athletes to build a brand and long term shareholder value?
BYND IS NOT GOING TO CHANGE HOW CONSUMERS EAT AT RESTAURANTS
The other significant long-term issue revolves around the growth of plant-based products in the restaurant industry. The success of McDonald’s, Wendy’s, Burger King or any QSR concept was built on serving food that people want, which does mean healthy. Consumers know what they are getting from the QSR industry/brand and BYND or any other plant-based product is not going to change the eating habits of consumers. Is there a market to tap into, yes, but it’s not a $35 billion opportunity in the USA.
THE CHAIN RESTAURANT OPPORTUNITY IS SMALL
If plant-based products took a 5% share of the $235 billion in Chain Restaurant systemwide sales in the USA that would equate to an $11.7 billion market. If only 50% of the chain restaurants sell a plant-based product it’s only a $5.8 billion opportunity. If we assume that BYND gets 25% market share, the real opportunity for BYND is about $1.4 billion. The company cites a $35 billion opportunity in the USA, but I have a hard time getting there even including independent restaurant and other retail outlets. At a market value of $5.0 billion today, the stock is reflecting significant growth already.
GROSS MARGINS
On the earnings call management said in 2020, BYND will have capacity to generate $1 billion in revenues. As the company continues to build excess capacity and the real opportunity falls short of the company inflated TAM, the target of mid to high-30s gross margins is going to be difficult to achieve.
AGGRESSIVE INTERNATIONAL EXPANSION
On the recent earnings call management stepped up its commentary around international expansion. The CEO said, “looking forward, we've made significant additions to our team, including senior leadership in operations and marketing while investing in aggressive international expansion.” If we assume that management has over stated the international TAM like they have in the US, this aggressive expansion will only increase the likelihood of reduced margin structure and make the long-term mid-teens adjusted EBITDA margin structure more difficult to achieve.
More to come.
Howard Penney
Managing Director
Shayne Laidlaw
Managing Director
Jordan Minello
Analyst
