“The pricing environment in the tomato market has swung from one extreme to the other as elevated prices of last year due to at-home demand during quarantine have given way to one of the lowest pricing periods with tomatoes, specifically the commodity tomatoes like tomatoes on the vine or beefsteak varieties.” – Michael DeGiglio, CEO of Village Farms, on the conference call yesterday explaining the shortfall in the kind of tomatoes that AppHarvest grows.
Oatly launches its roadshow (OTLY)
Oatly is launching its IPO roadshow today. Oatly is a global oat milk producer to those vaguely familiar with it. To Oatly fans, it is a quirky brand selling delicious oat milk that is good for the consumer and the environment. According to the company, it is a purpose-driven, leading, authentic ESG brand with a mission to improve the sustainability of the world and consumers' health. At the top end of the $15-17 range, the market capitalization would be close to $10B. That would represent a price to sales multiple of 7.8x 2022 projections.
Oatly’s IPO will bring more attention to oat milk. Growing demand is something Oatly is very adept at. It has been on a roll of late with the national launch in Starbucks stores and its Super Bowl commercial. Demand has outstripped supply for some time in the U.S. which has benefited the other oat milk producers (who are often supplied by SunOpta). The market currently seems to be concerned that Oatly will take a share in plant-based milk from the other suppliers, hurting SunOpta. We can point to sales data that indicate that Oatly is helping grow the market for the competition. That is similar to the growth of Chipotle, Lululemon, and Under Armour - brands that share some similarities with Oatly. We plan to publish more in-depth research on Oatly ahead of the expected IPO next week, and please stay tuned.
California – what was bad, will be good (GO)
Sprouts Farmers Market reported a 9.4% SSS decline in Q1 as it lapped a 10.6% increase in the prior year. The comparisons against the stockpiling period were particularly difficult. In the weeks of April 5th and April 12th, the company has seen an improvement from traffic trends in March, as seen in the following chart. California arguably had the most restrictions of any state during the pandemic. Grocery stores have operated with capacity limits in the state for much of the past year. Sprouts have over a third of its store base in California.
California now has the lowest rate of new COVID-19 cases in the country. Several counties are moving towards the least restrictive tier, including Los Angeles, and the reopening of the state is planned in a month. An acceleration in customer traffic in California would be a strong tailwind for Sprouts Farmers Market and Grocery Outlet while other grocers face difficult comparisons for the next year. Grocery Outlet has over half of its store base in California.
Grocery Outlet reports today after the market close. EPS is expected to decline 44% to $.18 against the stockpiling period a year ago. SSS are expected to decline 7.8% in Q1, but an improvement in California against straightforward comparisons would drive better than expected, positive SSS in the 2H of the year. Grocery Outlet is positioned to have positive sales and earnings growth in the 2H of the year, before the other grocers.
Benson Hill SPAC merger announced (STPC)
Benson Hill announced that it would go public by merging with Star Peak Corp. (STPC), a SPAC. Benson Hill is a food technology company that uses CropOS, its food innovation engine, to unlock the natural genetic diversity of plants. Benson Hill targets the demand growth for soybean protein concentrate and yellow pea, which are used in plant-based meat products. The company’s strategy is to lower the costs of both products by using machine learning and AI techniques to accelerate breeding, enabling greater precision and fewer breeding cycles.
Star Peak Corp. has $403M of cash and a PIPE of $225M for a proforma enterprise value of $1.35B. The transaction is priced at 8.4x 2022 revenues. AppHarvest’s President David Lee is a director of Benson Hill. Benson Hill had revenue of $102M in 2020, and the projected CAGR over the next seven years is 46%. At the end of last year, Benson Hill reported that it had bred various soybeans that contain higher protein and oleic acid. We have several questions that we would like to explore: Has the company proven its soybean variety can replace the production steps to make soybean protein concentrate? What premium can its yellow pea seeds command, and is the demand from the farmer or the pea buyer? How will it enforce royalty payments from soybean farmers who can keep some of the crops as seeds for the following year?
Benson Hill reports tremendous future demand growth for plant-based protein to replace meat, as seen in the following chart. 70% of the soybean crop is used for animal feed, so it is unlikely there is a shortage of grain crops if plant-based meat replaces conventional meat. Benson Hill aspires to be a key ingredient supplier to the plant-based meat industry and seed breeder to farmers that will grow the plants and uses Beyond Meat as a valuation comparable.
