Forget the Harvard study that shows a four-ounce Beyond Meat (NASDAQ:BYND) burger has 390 milligrams of sodium, almost five times the levels for a regular meat equivalent; That’s the least of the company’s concerns now. A lawsuit against the company is gaining speed, and the ramifications for Beyond Meat stock are all too real.
Companies, especially prominent ones, often face legal issues from disgruntled former employers, suppliers, etc. The fact Don Lee Farms is suing the company for breaching its exclusive supply agreement and misappropriating trade secrets, in and of itself, doesn’t mean anything.
However, the fact that Los Angeles County Superior Court Judge Mary Strobel has granted a motion for a writ of attachment directing Beyond Meat to set aside money to make restitution to Don Lee Farms should make recent buyers of Beyond Meat stock take notice.
Up 57% year-to-date, these gains could disappear in a hurry if the company’s legal fight heats up further.
What does a future finding in favor of the plaintiff mean for Beyond Meat? Could a verdict against the company sink it financially? Or, is this a case of the media making a mountain out of a molehill?
I’ll take a look at both sides of the argument.
It Will Cost Beyond Meat Stock Dearly
Frequent InvestorPlace contributor Laura Hoy recently covered Beyond Meat’s legal troubles for CCN.com. In her article, Hoy highlighted the fact Don Lee Farms is seeking repayment of outstanding invoices between April 7, 2017, and May 16, 2017. Those invoices amount to a little less than $629,000, or 0.3% of its revenues over the last 12 months.
In other words: A drop in the bucket.
However, what’s far less straightforward from a financial perspective is how much the company will have to pay if found guilty of misappropriating trade secrets, or committing fraud. My guess is both would come with a much higher price tag than those outstanding invoices.
The question is, though, how much more? I’m not a lawyer, so any figure I throw out is merely conjecturing on my part. That said, I’ll give it a whirl.
Before I get into financial spitballing, let me remind investors that class-action lawsuits have come out of the woodwork. So, if any further damning evidence surfaces once the trial starts in May, you can be sure that the legal community will put on a full-court press.
Now, back to my calculation.
Based on the unpaid invoices (approximately six weeks of supply), we’re looking at $100,000 per week in lost cash flow to Don Lee Farms. If Don Lee Farms maintained its exclusive agreement with Beyond Meat through today, that’s $13.6 million in lost revenue over 136 months.
Then, one has to consider the more serious allegation that Beyond Meat altered a food safety report. If that were true, it’s hard to calculate what a judge might award in this instance, but I’m guessing it would be much higher than $13.6 million due to Beyond Meat’s market capitalization of more than $7 billion.
Finally, there’s the smackdown the FDA and Securities and Exchange Commission could apply to the company, moves that would most likely ruin its reputation.
The financial cost of any legal awards to the plaintiff would most likely be covered by insurance. However, the reputational damage would be permanent.
Overall, the stakes of this case are much higher than you might think.
Nothing to See Here
First, let me say that just because class-action lawsuits have reared their ugly head does not mean that Beyond Meat has done anything wrong. Class action lawsuits happen these days whenever a company CEO sneezes the wrong way.
I’m joking, of course, but you get the meaning. America is a litigious nation.
That said, Beyond Meat countersued alleging that Don Lee Farms breached its supply agreement by providing product that did not meet the company’s food safety standards. Further, when confronted with food safety concerns, Don Lee Farms did not take appropriate action.
What we have here is a “he said, she said,” type of scenario. The judge will have to sort through the evidence from both sides to determine each side’s liability. That could take weeks to unravel. And, in the meantime, investors fret.
However, note that Beyond Meat hired a new legal team after the Jan. 22 decision by Judge Strobel. So, if it wasn’t taking the legal battle seriously before, it is now.
The Bottom Line on Beyond Meat Stock
In late December, I said $75 was a good entry point to buy the Beyond Meat stock. In hindsight, it’s gone on to appreciate by 57% since then.
At the time, I wondered whether it was worth $25 or $250. I concluded it was neither, but still recommended investors consider buying.
As Beyond Meat faces its toughest test yet as a public company, the ramifications of a poor showing in the courts could be deadly.
Thus, even though I believe in the concept of “innocent until proven guilty,” I would stay on the sidelines until its legal issues are resolved.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.