Bernstein analyst Alexia Howard downgraded Beyond Meat (BYND) to Market Perform on valuation following the recent stock outperformance as she believes the company's near-team sales growth potential in the U.S. is "largely priced in at this point." This comes a day after Beyond Meat announced a multi-year protein supply pact with Roquette and the company’s Executive Chairman Seth Goldman teased plans to enter the Chinese market.
GROWTH POTENTIAL PRICED IN: In a research note to investors, Bernstein's Howard downgraded Beyond Meat to Market Perform from Outperform with an unchanged price target of $106. The stock has rallied 55% thus far in 2020, fueled by recent news including McDonald's (MCD) expanding its test of Beyond's P.L.T. burger in Canada, the analyst noted. Howard believes Beyond Meat's risk/reward has become less attractive following the recent rally and sees Beyond Meat’s near-term sales growth potential in the U.S. "largely priced in at this point." That said, there could be share upside if Beyond Meat expands internationally down the road, the analyst acknowledged. Nonetheless, Howard noted that the Chinese regulatory environment could be difficult to navigate and Beyond Meat will need to adapt its products based on local preferences.
PEA PROTEIN SUPPLY PACT, CHINESE MARKET ENTRY: On Tuesday, Beyond Meat announced a multi-year pea protein supply agreement with Roquette. The supply agreement significantly increases the amount of pea protein to be supplied by Roquette to Beyond Meat over the next three years as compared to the amount supplied in 2019.
Meanwhile, Beyond Meat's Executive Chairman Seth Goldman told China news agency Xinhua that the company hopes to enter the Chinese mainland market this year. "We haven't announced anything, but we are expected to do something this year," Goldman said Monday on the sidelines of Retail's Big Show 2020, according to Xinhua. Beyond Meat has launched its plant-based burgers and sausages in Canada and European countries, and is looking to build production facilities in other countries and source locally, Goldman added.
MCDONALD'S EXPANDING PATTY LAUNCH: Earlier this month, McDonald's said it was expanding the global test of its plant-based burger to include 52 restaurants in Southwestern Ontario, Canada starting January 14, for 12 weeks. The P.LT., which stands for Plant. Lettuce. Tomato., is made with a Beyond Meat plant-based patty that has been crafted exclusively by McDonald's, the company said in a statement. The global P.LT. test first launched last September in 28 restaurants in London, Ontario and the surrounding areas. The additional restaurants now participating in the test include selected locations in Kitchener-Waterloo, Guelph and surrounding areas, while the majority of the restaurants that were part of the initial test in London and nearby towns will continue to offer the P.L.T. without interruption. As of January 14, the P.L.T. will be priced at C$5.99 plus tax.
In a research note to investors last week, BTIG analyst Peter Saleh said he wonders if Beyond Meat could supply enough product should McDonald's want to expand its plant-based patty test throughout the U.S. While the analyst believes Beyond could produce enough product in the near-to-medium term to supply McDonald's restaurants in Canada, Saleh is less convinced about the company's potential to support McDonald's U.S. system, especially if demand grows.
The analyst estimates that at least a 5% sales mix would be required to justify making P.L.T. a permanent menu item or expanding the item to the majority of McDonald's Canada's 1,480 units. In the U.S., he believes McDonald's would require at least a similar 5% sales mix to justify the effort. Beyond would need to produce 85M to 100M pounds of the plant-based product to support all 13,900 U.S. locations, the analyst wrote. Assuming the product was introduced nationwide in North America, he believes Beyond would need to produce 95M-115M pounds of product annually, or more than three-times Beyond Meat's food service capacity run-rate for 2019. Saleh has a Buy rating on McDonald's with a $240 price target and does not rate shares of Beyond Meat.
PRICE ACTION: In late morning trading, shares of Beyond Meat have dropped over 7% to $108.72.
