Beyond Meat (NASDAQ:BYND) reported higher-than-expected sales growth in the second quarter but left investors in the dark about its outlook. As a result, BYND stock is probably overvalued, especially since the company does not yet make net income profits.
Moreover, its margins as a food company are nothing but average.
If you take away its sales growth, this is an average stock. Its margins as a food company seem to be nothing more than average. They certainly are not high enough to justify Beyond Meat’s high valuation.
For example, its adjusted gross margins of 34.9% for the quarter ending June are not to shout about. Its adjusted EBITDA margin (earnings before interest, taxes, depreciation, and amortization) are mediocre at best at 10.1%.
What Analysts Expect for Beyond Meat
A poll of 19 analysts by Yahoo! Finance expects revenue to rise by 246% this year to $470 million. However, next year, they expect growth will slow down, not accelerate. The average estimate is forecast to be $715 million. That represents an increase of just 52% for 2021. That is a significant de-acceleration in sales growth.
Moreover, since Beyond Meat has an $8.1 billion market capitalization, it values BYND stock on a high forward price-sales ratio of 11.3x.
This is normally the kind of multiple that is set by the market for earnings, not sales. In other words, it assumes that sales will continue to accelerate, not de-accelerate. For example, if sales were to double twice, it would reduce the multiple on sales to just 4.9x by 2022. That would be a more reasonable multiple since it has a slowing growth rate.
Moreover, analysts expect just 59 cents earnings per share (EPS) in 2021. That assumes the Covid-19 pandemic is over and the company’s sales and earnings turn around.
This still puts BYND stock on a high forward earnings multiple of more than 200x. Seeking Alpha’s poll of 18 analysts shows 2021 EPS of 61 cents, which is only slight improvement.
The only way this makes sense is if earnings rose by 4 to 5 times in the next several years. For example, if EPS in 2024 were expected to be $3 per share, then today’s price would only be at 43x earnings in four years.
But that is not likely to happen given its slowing growth rate and its mediocre margins.
What To Do With BYND Stock
After the earnings came out, Barron’s wrote that it is explainable why the stock fell. In essence, the market wants to see accelerating growth prospects. The problem is Beyond Meat took away all its guidance for the future. The Covid-19 pandemic is having a dampening effect on its growth rates in both restaurants and food retailers.
Analysts paid particular attention to the lower food service sales by Beyond Meat. In the past quarter, its restaurant client sales fell by over 56%. That is not good for a stock that trades at 11.5x sales and more than 200x forward earnings.
Bank of America came out with an “underperform” rating for the stock. The analyst said that its heavy reliance on the global food service channel would “weigh on the stock.” There is no clear timing when its partnerships and new launches with restaurants would pick back up.
This means that at best BYND stock will trade within a range. However, given its average margins, mediocre growth with high multiples, I expect the stock will have periods of deep retrenchment.
Therefore, the patient investor who really likes BYND stock will wait for lower prices to initiate a position. If you already own the stock consider selling it, especially if you have a profit. The least you should do is wait for an opportunity to lower your average cost at points when it spikes downward.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. He runs the Total Yield Value Guide which you can review here.
