Fundamentally Furloughed

Beyond Meat - BYND (Hold)

While I have been unlucky with Beyond Meat, it might be the stock for you.

Now that the first wave of hype has died down around Beyond Meat, we can take a step back and look at the fundamentals in a bit more detail. What makes Beyond tick, and are they set up for the future?

What Does Beyond Meat Do?

They are one of the fastest-growing food companies in the US, offering a portfolio of plant-based meats. There are a few players in this space, but Beyond has taken the approach of building meat directly from plants. In the fake-meat market, there are several blockers to converting traditional meat-eating customers, taste, texture and other sensory attributes. While at the same time aiming for the nutritional and environmental benefits of plant-based meat products.

While Beyond has their production facilities, they also co-manufacturer with other firms, this is how they have expanded into Canada and the Netherlands.

I’m going to list all the planet-based alternatives as we are here as investors, the important bit to understand is how they separate their business lines and revenue streams.


Source: Beyond Meat Q1 2020 Announcement

The business is split into four areas, first by Geography. With a strong home base, almost three-quarters of revenue comes from the US. The rest is simply classified as international.

If you have ever looked at Beyond’s financials and these numbers seem wrong, they have recently reclassified international to include Canada, before this was considered part of the US (not sure how the Canadians felt about that.) The big figure to keep a close eye on is the international one. The CFO is extremely bullish about the Asian market, while there was a meat shortage scare in Asia that caused a brief rally for Beyond, this was speculation. However, the partner tests in the Asian markets have shown high demand either because of novelty or genuine customer desire to have an impact, whatever the reason, they will be entering Asia with a strong brand.

The other dimension of the business is how they distribute the products. Retail simply covers direct to end consumer sales, as well as supermarkets. The key difference is you are buying the branded product packaged up to prepare at home.

Foodservice means whenever you sell the product to a business who will prepare the product or alter it in some way before selling that onto the end customer. e.g. going to a bar and ordering a Beyond Burger with chips. The business who brought the burger from Beyond Meat would show up under the foodservice distribution channel.

With these two pieces of information, we can already tell Beyond’s distribution and geographic positioning. At home, there is a big focus on selling to customers to enjoy at home, with some partnership tests e.g. KFC. Outside of the US, the biggest push is through foodservice companies.

Now that Canada is included as international, that would skew the retail figures. Being the second market they started pushing their retail offering, it has had far more time to develop and benefit from the American marketing.

How Has COVID-19 Impacted Beyond Meat?

COVID-19 has impacted us all different, and seeing how companies have reacted is telling of managements style and positioning. Beyond has kept its manufacturing fully operational and sent head office staff to work from home.

Innovation and R&D have both slowed down. As this is a company seeking to break new ground it’s innovation efforts are key to its future growth. In-person and feet on the ground marketing efforts have been frozen, however, marketing and promotion is by no means taking a break.

The real risk here is the protein and ingredients they source are globally distributed, meaning they are feeling the squeeze from any overseas sources.

However, one risk has already been felt. The foodservice business. Restaurants and the whole food preparation as an industry has taken a nosedive. While Beyond opened the year with very strong momentum and a string of exciting new partnerships, stay at home orders flattened these plans.

However, this has led to an increase in people shopping and buying food themselves. Causing a bump in retail orders. This has offset some of the negative impacts but make no mistake, Q2 2020 is going to make for some bleak reading. Beyond has already signalled that Q2 will be worse than Q1 as their revenue is crushed but R&D and most activities have carried on, in short, they are in a cash burn situation expected to impact the whole of 2020.

If you are a big Beyond fan and wanted to know why there are no new partnerships or marketing, don’t be surprised if they are delaying these until closer to the end of 2020 to create a more impactful 2021.

What About The Fundamentals?

I held Beyond Meat a while ago, and brought in around the hype as a momentum-based investment, I ended up locking in a nasty loss, meaning I am even more interested in how this looks compared to the rest of the market.


Source: Genuine Impact

Underperforming the rest of the market, and grossly overvalued is about what I expected. However, if we want to understand what is going on with Beyond we need to dig into this some more.

It’s no secret that Beyond Meat isn’t a profitable company. But I want to see for myself what this means for their accounts and where the money is going. Last quarter Beyond brought in $354.76m and posted a loss of -$3.97M.

I am extremely off-put by the 33.49% gross margin. The cost of simply producing the goods is extremely high, leaving almost no room for any other activities or investment into scaling the business. All it takes is for a key supplier to increase their prices to force this gross margin as tight as possible. In terms of risks to the business, the scalability is at risk which such high production costs. Keep in mind the gross margin doesn’t include R&D, marketing, one-off costs, or even admin activity. This should be the costs directly related to creating revenue.

If you are a dab hand at statistics you would have worked out the profit margin is -4.18%, meaning we are loss-making.


Source: Beyond Meat Q1 2020 Announcement

Now the quarterly report does show a small profit being made (there were some interest payments about half the value of the profit and a very very tiny amount of tax.) Which is great to see, but we already know they had a better than expected start to the year, with next quarter being a very serious drag. If it was not for COVID-19 Beyond was on the edge of posting it’s first annual profit.


Source: Wallmine

Historically Beyond has struggled as it chased market share and brand promotion. With no dividend and a high growth strategy, and another year of losses ahead of us, there is little value as a shareholder. While Beyond is in this growth stage investors are taking a very long term view or holding for shorter-term share price improvement based on optimism.

One thing that did stand out to me was the debt control. In the cash screenshot, we can see the assets to debt being relatively well managed with a sudden boost in financing. I wanted to look at the recent quarters to understand what is happening in the short term.

$246.4m in cash, and $120.7m in inventory against $71.9m in current liabilities, with most of this, focused on accounts payable. Looking at the longer-term debt I only see $43.4m on the balance sheet. All in all, they aren’t as leverage as I would expect from a high growth company.


Source: Wallmine

I mentioned Beyond is very overvalued right now. After covering their finances this shouldn’t be a big surprise.

beyond one year
Source: Yahoo Finance

We have a price to sales ratio of 24.33x, price to book of 22.47x, even the price to earnings to growth is a nasty 8.30x. In terms of buying Beyond based on their inventory or assets, it just doesn’t justify the entry price.

Low-value high growth companies are very common, which represents the high level of risk involved with this strategy. Either we’ll see the explosive increase in debt (thankfully they are low on debt so this is an option in a pinch) or a ramp-up in R&D spending resulting in more years of cash burn and loss-making.

I’ve been told I can’t look at high growth, speculative, young companies like Beyond Meat in the same way as an established player. However, without the fundamentals and judging what risks we are comfortable taking, what will be basing our investment decisions on? As someone burnt once by Beyond Meat these valuations and deep speculative bets are a warning.

However, I am not an expert, that much should be clear. With that in mind, what do the sell-side experts have to say about Beyond Meat?


Source: Genuine Impact

I am slightly surprised at the even split of analyst ratings. I wanted to dig into this some more, as analysts don’t all rate at the same time, and given the market, a lot of them have been extremely busy.

We only have 9 analysts who have posted new guidance within the past month. Given how explosive the share price has been this does leave us behind a bit.


Source: MarketBeat

Ignoring the differences in analyst numbers, the striking aspect to me is the overwhelming sell shift and the lower target price. With the average coming in at a 30% discount on the price right now.

We have Bank of America setting a target price of $68 a share but on the other hand, BTIG believes it’ll be $173 (both lower than what I paid but I’m not upset at all.) The range is huge. With spotty fundamentals, an extremely painful incoming 2020, and no clear dominant player in the market, this is a hard stock to judge.


Source: Genuine Impact

The future share price returns are a complete unknown, with poor confidence where it will be. Putting a value on the company results in an overvalued mess, but buying into the hype sets us up for 50% return expectations, with very little in between.

What we do agree on is the high growth of revenue and potential EPS in the future. We know 2020 is going to be another year of struggle, but looking past that we have seen great historic growth and we know they are on the edge of posting their first profitable year.

A Sell or A Hold?

As a recommendation, I would go with a hold stance. I sold out and locked in a loss because I wanted to deploy my money elsewhere. Unless you have that level of confidence then I wouldn’t see a strong reason to redeploy your capital.

If you are comfortable with a five-year horizon then Beyond is well placed to expand and become a profitable player who can optimise their operations. There is scope for improvement.

I would strongly advise against a buy. 2020 is going to be disappointing, the next three quarters will be lower than expected. Beyond have even said they will push a lot of their strategy into 2021 and accept this will be a weaker year. If you are keen to buy into Beyond Meat, there will be better opportunities. As long as you are a long term believer then there is nothing for you to do, but if you brought into the hype, you will find a faster recovery elsewhere in the market.

This has been a very tricky stock to judge, and I always love to hear your feedback! Let me know if Beyond on your watch list? Or maybe you already brought in?

Stay safe and thanks for reading!

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@jcksmith850 I’ve been listening a lot to Cathie Wood from Ark invest. Would be interested in your analysis of Illumia, CRISPR Therapeutics &/or Invitae. I think you have some exposure to these from your investment in Scottish Mortgage Investment Trust

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If you want a good one ITM Power - no idea what is happening there

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Great suggestions and thank you reading! I’ll have a look around and see what makes for some exciting analysis.

I gave this a quick look and it was pretty wild. The coverage is low too with analysts being very split on them, and the fundamentals at a glace are in pieces. I don’t think I’ve covered an energy sector company like this before so this would be flexing some new bits of my brain!

I’ll catch up with the news and see what’s the most interesting!

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I don’t own any and did do a bit of analysis myself and decided it was a sell, at the price it is now.

Will be interested to see what your thoughts are.

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ITM Power - ITM (Buy)

Thank you @don_quixote for the interesting suggestion!

ITM is a British manufacturer that provides hydrogen energy solutions. They are AIM-listed, which does limit the access to financials and analyst coverage, but they have been listed since 2004 giving us some history to judge. Looking at the fundamentals and what is happening in the industry, I’ll try and work out if this is a good long term investment or not.

itm logo

What Does ITM Do?

Hydrogen energy solutions is a broad statement which doesn’t tell us too much about the business. What we can do is look through their financial reports to see how they divide up their own business as well as the products they have on offer.

Their solutions include grid balancing, energy storage, production of green hydrogen for transport, and renewable heat and chemicals. However, this isn’t what you will see on their balance sheet, there are two ways to breakdown their revenue, the type of operation and by sub-industry.


Source: ITM Interim 2019 Report

Construction contracts make up the lion share of the revenue for ITM. A large part of their business is installing large bases for refuelling, energy containment, or even processing plants. For example, having a fleet of hydrogen busses means you need a specialist refuelling station. You could either lease one or pay ITM to construct one complete with their hydrogen converting machines.


Source: ITM AGM 2019 Presentation

Consulting also makes up a large part of their revenue. Being experts in their field ITM also offers to consult for both their installations as well as others. Not only is this any additional revenue line, but it also means existing installations are kept at maximum capacity and clients are happy.

Maintenance is split out from consulting and very strict about the reoccurring revenue of their machines and sites. This is also an interesting measure of existing finished sites where they are making ongoing revenue versus lots of new projects. Seeing this number increase means we have more finished projects bringing in a stable base of revenue, for what we hope is dramatically less cost.

Fuel sales are direct sales where they own the site and equipment and clients are charged to purchase hydrogen for their machines. This also includes selling fuel in bulk.

Finally, we have the always present “other” category, for any minor revenues which don’t live anywhere else. This line is different from other operating income or one-off gains like selling parts of the business or a previously owned site.


Source: ITM Interim 2019 Report

Alternatively, we can break down the business lines by what industry they relate to. This does mean some projects will be split across different segments, the totals always add up the same but it gives us some insight into why clients are coming to ITM.

Power-to-gas also is known as P2G is converting electrical energy into a gas, in this case, hydrogen. Two reasons for wanting to do this, firstly this is the end product (for ITM the next business line is where you see this as the end product), and secondly to store power. Electricity is a pain to store and can be expensive to keep as raw electricity. By converting this into a gas, it’s easier to store and then use the gas as the power source. It’s a great way to transport power without all the expensive infrastructure.

Refuelling is where ITM is powering machinery and vehicles. The main business for ITM is building refuelling depots. Buying a contract from ITM to build you a hydrogen refuel station for your new busses would show up as a construction contract and be created as part refuelling in this view.

The chemical industry is the leftover parts of the process which can still be sold and converted. It also includes taking P2G and performing more work to convert it into LPG. This means you can still produce liquid petroleum gas from ITM’s equipment. Most of their customers won’t want to be left with P2G and will want the extra steps to end up with LPG.

ITM also has another source of income not listed here.

Grants from different governments and bodies to further the research and development of clean energy. In 2019 ITM took £6.8m in grants, in the same period they made £4.6m in revenue. This is powering a significant about of R&D for the business, given we are in a situation where global governments have more pressing needs for their money, this is at risk of slipping.

What Do The Fundamentals Tell Us?

I mentioned an AIM listing makes this a bit harder. From a regulatory standpoint, they don’t have to release as much information about their company as someone on the main exchange. AIM stocks are as a blanket rule, much higher risk because of this.


Source: Genuine Impact

This kind of heavily skewed relative rank is expected. It’s a small company which a lot of volatility. As always I want more context and will dive a bit deeper to understand what this means.

When looking at what ITM does I showed some financial statements and also highlight they historically have brought in more grants than revenue, which isn’t a long term sustainable approach.

The revenue for the trailing twelve months was £5m, and they ended up with a -25.49% gross margin. Even before we look at the rest of the financials we can tell the cost of making revenue is painfully high and bleeding cash. If we take into account the rest of the costs with running the business we end up with a shocking -£9.45M loss. A profit margin of -205.88% is rare to see. The bulk of this heavy loss is down to two items, cost of revenue (as we know) followed by prototyping, which is considered separate to R&D.

Being so cash-intensive there are no dividends and as a shareholder, you can expect a negative EPS, currently sat at -2.90x.


Source: Wallmine

What is interesting is the massive recent cash injection of £58.8m. This was completed as fundraise, meaning the company only has £18.11m in debt. Due to the way the reporting works all of this debt is listed as due within the year. If we face this off against current assets we see a very impressive £83.64m if we stretch ourselves and include long term assets we end up with a respectable £92.99m in assets.

While the company is bleeding cash, the assets are increasing. There is heavy investment in prototyping and developing new machinery to increase their reoccurring revenue beyond the first core sale. A riskier strategy but not an uncommon one for smaller companies. ITM can cover their liabilities and obligations in the short term, which does put them ahead of their similarly structured peers.

On the surface, the financials appear weaker than they are but based on the earnings we can expect this to be an overpriced stock.


Source: Yahoo Finance

We are trading at all-time highs, and the momentum behind the price movement is very strong. Which is going to drastically harm the value assessment.

A price to sales of 177.69x and price to book of 53.96x are both abysmal figures. The recent fundraising has helped push the cash to shares to 0.02x, still very weak compared to what we would expect but a move in the right direction.

This is not a value purchase in any sense. You are paying an extreme premium based on old figures for a company which doesn’t have the same level of reporting requirements you would expect from a main market listed company.

At this point, I would expect you to be very put off. The sell-side analysts with their future growth predictions for ITM are pegged to be extremely high and aggressive.


Source: Genuine Impact

We know that ITM has missed every single one of its revenue and EPS targets set by Wall St, and judging by the even split of analyst ratings I would say they are mostly out of date. This is a small AIM stock, it’s not going to have a strong following or large amounts of analysis available.

What stood out to me was the biggest driver behind why the future is looking so promising, and this helps us to understand the aggressive price growth as well.


Source: Genuine Impact

The smaller size of ITM means that in relative terms it is much easier to produce multiples in terms of future returns. Microsoft making an extra ten million a year won’t have a big impact, you’d expect it. For ITM it’s life-changing.

What Has Happened Since The Last Report?

With a lack of analysts, less frequent reporting, and lower coverage in general. It can be harder to understand. This is where I’m going to be a bit more predictive and look into the recent announcements since their last report.

ITM has won two new projects, new grant secured, and one other project is advanced to the next stage. This is huge news.

The last report mentioned £42.4m was currently in their backlog pipeline, with another £248m under negotiation. They have delivered on previous contracts and now executing on new deals.


Source: ITM Interim H1 2020 Results

We have a new JV kicking off, and these new deals entering testing to see if wider adoption is on the cards, there is a lot to be excited about.

Deploying Hydrogen Fuel Cell BusFleets for Public Transport across Australia

Funding Award to Supply an 8MW Electrolyser (£10m across 2021/2)

Green Hydrogen for Humberside Project DeploymentStudy

Industrial-scale renewable hydrogen project advances to the next phase

Right now ITM is losing out whenever it brings in revenue due to the higher costs, that is also why they are investing so heavily into prototypes and getting grants. To radically reduce the cost both to produce and buy.


Source: ITM Interim H1 2020 Results

Why Do I Like This Risky Buy?

Let me be clear, AIM stocks are sensitive and unpredictable beasts. It is a much riskier investment and can be way more volatile. As a smaller chunk of my portfolio, I am willing to take on some risk.

There is a lot for me to like here. They have a great pipeline of work and new contracts, which are spread across Europe, with some in Asia, but the biggest focus is here in the UK. ITM has 37 contracts they are trying to close currently. The cost of goods is decreasing and the prototype funding is not coming from their pocket or shareholders, it’s coming in the form of grants.

The latest fundraising has been done to address the working capital and to keep the books in balance while they keep delivering projects. Projects which once delivered still yield a return in the long run.

A company like this I would typically call an acquisition target and paint that as the exit. Here I feel there is more to give. Expanding with more JVs like the Linde deal, deepening their partnerships with Shell and Toyota, and pushing forward the deal to supply the infrastructure for keeping Australia’s hydrogen busses going are all huge prospects.

The renewable space is huge, and ITM is pushing the core technologies and requirements forward. For me, they are making the right noises and show a lot of promise. There is a big risk in terms of cash flow and deals falling out the pipeline, but I have a bullish outlook for longer-term infrastructure work, and COVID-19 has only pushed forward the demand for cleaner energy and living.

Let me know what you think of my assessment, is this a stock you have looked into yourself? One to watch or are you avoiding it?

I had a great time writing this and I hope you found it insightful, let me know if there is anything you feel is missing or I should add.

Thanks for reading and stay safe.

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Great write up about this! I have been looking at them for not that long but like the future prospects of them, also they are heading forwards as green technology coMpany which ticks a box for me on this investment. As so often the case I wish I had paid more attention to them even only a month ago, however I have a small holding with them, and will likely add a little to them each month for now, as an aggressive high risk holding ( I do not have many of these in my portfolio). I hope, obviously, they do very well either on their own or get bought out by shell or BP in which case the shares should do ok then. Exciting and one to defiantly keep tabs on.

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Interesting take - definitely wasn’t expecting a Buy! Personally I’m avoiding as I think hydrogen is over hyped. The only niches I could see it potentially gaining traction would be for Airplanes and Trucks where the tradeoff of low conversion efficacy is worth it for the faster refueling/charging and capacity (the weight of electric batteries for trucks/planes make them untenable atm i think)

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I have thought that but I could see them, or hydrogen, being utilised in industry a lot more. I may be wrong, but I think there is potential to be used in gas fired units with little modifications needed, could be a huge draw in industries that are keen on going greener. Who knows!

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Nice write up - I agree with you that purely on financial info alone it is difficult to rationalise a case for the current share value so people are clearly trying to factor in future prospects.

Not all hydrogen is equal - personally I think that ITMs technology choice is more likely to be a long term winner than some of their competitors.

I’m also not so sceptical about the long terms prospects of hydrogen compared to some - just as we saw a large scale switch from coal to gas, I think you could envisage a large scale switch from gas to hydrogen (before you even consider hydrogen’s other uses in chemical production). After all burning hydrogen gives you water rather than CO2.

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http://www.roperld.com/science/fuelcellspollution.htm :thinking: :thinking:

Could we see a review of Berkshire Hathaway?

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@jcksmith850 have thought about publishing your own blog/website? Go for it

Note: I didn’t buy/sell shares in the companies you’ve been looking at. And I’m thankful for your effort

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I think that is called fake news or bad science! Yes water is a greenhouse gas but no it isn’t as important as CO2 as it is pretty short lived (if we get too much water vapour in the atmosphere it rains!).

Hydrogen has much higher energy density than petrol (though it needs to be compressed and is much more explosive) so the amount of water released should be less than petrol engines - in fact it is about the same:

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Not sure how my employers would feel about that! We have restrictions even on social media. Not sure if it all applies while furloughed. Who knows, if they let us go then I guess I can do something more with this!

I always want people to do their own research. I just like to summarise my position, I hope you find my insights interesting or at least entertaining!

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A really good write up on hydrogen power and where it makes sense.

Hydrogen is much more likely to be prevalent in heavy vehicles such as buses, trucks and ferries than cars.

We could sit as a society and wait for the perfect solution, that all hydrogen is produced from renewables but that takes too much time. The way forward is to use existing infrastructure and energy sources, and building up CCS (carbon capture and storage), which will allow us to start decarbonising almost immediately.

Some interesting insight with some realistic considerations.

Not sure how my employers would feel about that! We have restrictions even on social media.

Now I’m curious, what sector do you work in? :laughing:

Finance as a developer. Our HR policies feel very antiquated :cry:

I always thought it was a stable job and didn’t have to worry, guess it wasn’t as sure a thing as I hoped. These write ups and looking at my portfolio has been a fun distraction, but I do worry if I will get my job back.

I better keep improving my investing skill just in case :worried:

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Finance as a developer

Sounds interesting!
So like a Quant?

I’m also a developer, luckily not furloughed (work in energy sector). Wouldn’t worry too much? Worst case you find another (probably better) job :slight_smile:. Hang in there.

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I wish! I’ve always dreamed of making my own algo. Honestly have no idea where to start!

Just back office data processing mostly. Moving around data and sticking together APIs so the middle/front end guys have an easier life.

It is why investing is so interesting to me. Seeing all this data every day I wanted to learn about it and know why I was gluing data together rather than just doing it!

After looking at ITM the energy sector seems way more exciting than I ever expected!

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