An Urban's Rural View
A Tale of Two Food Companies
Pilgrim's Pride is the second largest producer of chickens in the U.S. Last year it churned out 156 million pounds a week. (https://www.thepoultryfederation.com/…) It's a big supplier to KFC and is one of the sources of Costco's famous $4.99 rotisserie chickens. In 2018 it had revenues of nearly $11 billion and net income of just under $250 million. (http://ir.pilgrims.com/…)
Beyond Meat describes itself as a maker of plant-based burgers and sausages. It just went public in May. This year it expects revenues of $210 million and thinks it may even break even. (https://www.fooddive.com/…) That would be a first; it has yet to post a profit.
Both companies are listed on the NASDAQ. (Brazil-based JBS owns about four-fifths of Pilgrims Pride's stock but the other fifth is publicly traded.) Which company do you think has the higher stock-market valuation?
You guessed it, Beyond Meat. Despite having less than a 50th of Pilgrim Pride's revenues and no profits, Beyond Meat's market cap (stock price times shares outstanding) on June 11 was $7.58 billion. Pilgrim Pride's was $6.74 billion.
This shouldn't surprise us, actually. Wall Street loves a big idea. A stock's price is built on investors' estimations of future profits, and those estimations are often built on big ideas.
For years, Wall Street was swept away by the big idea of electric cars. Tesla commanded a higher valuation than General Motors, even though GM made a lot of cars and a lot of money while Tesla made little of either. Tesla's market cap has since declined and is now well under GM's, but it's still nearly as high as that of BMW, a much more substantial auto maker.
The big idea behind Beyond Meat's rocketing stock price, which has quintupled since its initial public offering in late May, is plant-based meat. Impressed by the sizzle and bleeding of the new high-tech plants posing as meat, Wall Street seems to think the future is theirs. If they taste like real meat -- and by most accounts they're close -- investors assume a lot of meat eaters will make the switch.
Somebody, I think, should find this scenario worrisome. The question is who. Livestock raisers and the row-crop farmers who provide their animal feed? Or stock-market investors?
One reason for investors to worry is that Beyond Meat is far from the only player in the plant-based meat game. Impossible Foods, which isn't publicly traded, is a strong competitor. Burger King is offering an Impossible Whopper; White Castle is selling an Impossible slider. Demand is so brisk Impossible is finding it impossible to keep up. Moreover, new competition is on the horizon in the form of food giants Nestle and Tyson Foods, both of which are promising plant-based meat offerings later this year.
Ethan Brown, Beyond Meat's founder and CEO, told the Wall Street Journal that "Competitors coming in validates the direction we're headed." (https://www.wsj.com/…validates the idea.) In other words, there must be a big market for plant-based meat if Nestle and Tyson Foods covet it.
But how big is the market, really? As I pointed out in a post in April, the only real competitive advantage plant-based meat has over the real thing is the consumer perception that it's better for the environment. On the two points that matter most to consumers -- price and taste -- real meat wins. (https://www.dtnpf.com/…) Sure, lots of folks will try the plant-based alternatives, but after the initial novelty wears off, how many will continue to choose the Impossible Whopper if it costs a buck more? Some, but surely not all.
A Motley Fool analysis on Yahoo Finance on June 8 urges investors to nibble on Beyond Meat's stock in small bites: "At this point the bull thesis for Beyond Meat seems to be a bet that plant-based burgers will be almost as popular in 10 years as traditional beef burgers are today. That seems to be the only way to justify the company's valuation, which now sits at a forward price-to-sales ratio of 34 based on this year's revenue guidance, a level normally reserved for high-growth, scalable tech companies, or even experimental biotechs."(https://finance.yahoo.com/…)
This is not to say ranchers and farmers should dismiss the threat of plant-based meat, whose niche in the market is likely to grow, and grow at the expense of real meat. But grow enough to justify Beyond Meat's meteoric stock price? Not very likely.
Plant-based meat is probably not as big an idea as Wall Street thinks. Something tells me a comparison of the market caps of Beyond Meat and Pilgrim's Pride will look rather different a couple of years from now. The ending of this story of two companies has yet to be written.
Urban Lehner can be reached at email@example.com
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