Beyond Meat beats earnings est, but withdraws 2020 forecast

CFRA Analyst Arun Sundaram joins Yahoo Finance’s Zack Guzman to discuss Beyond Meat's latest quarterly results amid the coronavirus.

Video Transcript

ZACK GUZMAN: As we have been talking about, the producers of meat in this country that have been struggling with the coronavirus crisis and reopening their lines there, what could be happening with meat prices-- a lot of people are pointing out that it could a huge boost to alternative meat companies like Beyond Meat. And Beyond Meat shares today are surging, spiking nearly 20% earlier today after reporting results for its first quarter.

The faux meat company handily topping expectations with revenues surging 141%. Over a year ago, the company did withdraw its full-year guidance after noting it's also reeling from its own uncertainty surrounding the coronavirus. And for more on that and how the company could stand to gain from rising meat prices, we're joined now by CFRA analyst Arun Sundaram, who joins us on the show.

And Arun, I appreciate you taking the time. When we look at this, Beyond Meat seemingly would benefit with the guidance off. What's your take on how they were able to deliver results this quarter?

ARUN SUNDARAM: Yes. Thanks, Zack, for having me. So overall, we thought this was a very exceptional quarter. Beyond crushed consensus estimates both on the top line and the bottom line, and they also realized an operating profit and net profit this quarter. So this is actually the only-- the second time in its history where they generated both a positive operating profit and net income.

But I think the metric that stood out to me the most was its gross margin line. So here, this Beyond gross margin at 39% this quarter is already top three or four in the entire packaged foods industry. Based on my quick analysis, I think only Hershey company and McCormick & Company have a LTM gross margins greater than 40% right now. So Beyond at 39% is remarkable.

So despite all these positives that-- despite these positives, I think it's important to stay grounded on the fact that COVID-19 only had a modest impact this quarter. It really only impacted the last two weeks of their quarter. So Q2, we'll likely see the biggest hit from this impact.

ZACK GUZMAN: Yeah. And clearly, I mean, you still have your $95 price target on the stock. Right now, it's trading at about $125 when you look at it, but you raise a good point. I mean, when you look further down the line. It's not expected the meat supply issues would last for quite that long, but the question does become their price point, right?

That's always been the question of if they can get their faux meat down to the same price as real meat and what it would do to make me steal some share from, you know, carnivores who actually do eat meat, since that's their core demo. What's your take on that and how pricing pressures could actually maybe not materialize the way that they are hoping for?

ARUN SUNDARAM: So yeah. So again, this comes back to my point of the fact that their gross margins this past quarter were with 39% despite some modest disruption from COVID-19. That means that next quarter and future quarters, they have some wiggle room there to increase promotional activity or take down prices and still realize relatively healthy margins and get closer to the price parity of traditional animal meat.

And that's Beyond Meat's eventual goal. I think they said that by 2024, they would like to at least have one of their products at price parity with animal meat. And if that happens, you know, this industry could soar and grow even faster than we initially anticipated.

HEIDI CHUNG: Arun, it's Heidi Chung. It's great to see you again. So it's hard to deny that there's a lot to love here about Beyond Meat. They certainly have a lot of tailwinds going for them right now. That being said, it seems like everyone forgot about the competitive landscape. Did everyone forget about Impossible Foods? They just announced a new expansion of its partnership with its retailer. So what do you think about the competitive landscape going forward? What does that mean for Beyond Meat and its share price?

ARUN SUNDARAM: Yeah. So as everyone probably knows, the competition in this space is getting even fiercer, by the month. There's so many entrants in this space, and most of the entrants are larger packaged food companies like Tyson Foods, Nestle, Kellogg, Hormel Foods. And then as more of these larger packaged food companies enter this space, there's a risk of commoditization, right? And then that will eventually hurt their pricing power, if that happens.

But I do think there's a long runway before we do see any type of commoditization in this space. And that's because the plant-based meat products that are currently on the shelves today won't be the same products that you'll see on the shelves two to three years from today. So Beyond has stated that, you know, they're innovating with the goal of replacing all their products on the shelves today.

So if any company is chasing them, they'll, you know-- they call it essentially chasing a ghost. So they're not satisfied by their taste, texture, or nutritional profile of their products right now. So as they continue to innovate and grow out new products, you know, the risk of commoditization is lower.

ZACK GUZMAN: Yeah. And Arun, to follow up on Heidi's question there-- I mean, when you do look at competition, obviously Impossible Foods has made the push specifically in the grocery segment. And Beyond historically has seen a larger share of its revenues made up in restaurant sales and food service outlets. That only made up 42% in the latest quarter. That was a drop from about 60% in the quarter prior.

So when you look at that shift and the way that its main competitor has been focusing on grocery now, if restaurants don't come back the way that a lot of people are expecting, I mean, what's the magnitude of the impact there if they are kind of more leaning in here on the grocery segment?

ARUN SUNDARAM: Yep. So Beyond Meat as well as larger packaged food companies-- obviously, everyone's experiencing disruption on the food service side. So what they're trying to do in the meantime is to shift production from facilities that were initially dedicated to food service and shift it over to retail. And I think Beyond Meat can do this relatively easier than a lot of larger packaged food companies.

And that's because the upfront manufacturing process for Beyond Meat is the same whether you're, you know, producing a product for food service or retail. It's only the back end of their manufacturing, which is actually outsourced to third parties-- that's where, you know, you distinguish the packaging between retail and food service. But the upfront part of the processing is the same, whether it's retail or food service. So they should be able to realize more efficiencies in Q2 compared to a lot of larger packaged food companies, who will face a lot more disruptions with idle or slow down in plants.

ZACK GUZMAN: Is that the same for, you know, the extra efficiencies versus traditional meat suppliers as well, I imagine?

ARUN SUNDARAM: Yeah, yeah. So yeah, they'll face those efficiencies as well as, you know, as you increase production, you're gaining leverage there. They're also focused on cost reduction efforts right now as well. So obviously, the 39% gross margin this quarter, it probably won't be sustained in Q2. But I don't think we'll see a drastic hit there. Maybe, you know, it go down to 35%, 36%, but nothing significant.

ZACK GUZMAN: Yeah, and probably why we're seeing shares continue to rise now by about 23%. But Arun Sundaram, thank you so much for taking the time from CFRA. I appreciate it, sir.

ARUN SUNDARAM: Yeah. Thank you.