Beyond Meat: Serving Up a Better Mousetrap
The stock market’s reaction to last week’s news from Pfizer (NYSE: PFE) regarding its successful COVID-19 vaccine trial candidate creates several trading opportunities. Below, I will discuss one that I find especially compelling. But first, a short trip down memory lane for some perspective.
The relative for whom I am named, “Uncle Jimmy,” made a small fortune as a patent attorney. He sometimes invested in a product idea that a client brought to him, but only if it satisfied two conditions:
- First, it must represent a material improvement over what is already available in the market in terms of cost or functionality.
- Second, there must be more than one way to generate revenue from it to avoid becoming overly dependent on a single source of income.
Uncle Jimmy scoffed at the adage, “If you build a better mousetrap, the world will beat a path to your door.” According to him, every invention he patented was a “better mousetrap” in one way or another. “What point is there in building a better mousetrap,” he would muse rhetorically, “if there are no mice to catch?”
His point being, a product has value only to the extent there is a ready market for it, no matter how good it is.
I was reminded of Uncle Jimmy’s wisdom last week when shares of Beyond Meat (NSDQ: BYND) plunged 17% after the company released its third-quarter results. Since cresting near $200 six weeks ago, BYND bottomed out below $114 on November 9 before closing the day near $125.
Fast Food Slows Down
By most accounts, Beyond Meat has built a better mousetrap in the form of its plant-based meat substitute products. I sampled one of their vegan burgers shortly after it was introduced last year. I must admit, I was impressed with its flavor and texture.
Apparently, so were a lot of other people. There was so much demand for the product that the company’s production capabilities could not keep up. Beyond Meat quickly assembled a wide array of restaurant partners that wanted to sell its products.
You can guess the rest of the story. As the coronavirus pandemic swept across the globe this year, many of the restaurants that sell Beyond Meat’s products closed down. Although some of them have reopened on a limited basis, the impact on Beyond Meat’s financial performance has been profound.
Beyond Meat suffered a net loss of $19.3 million in Q3, including $1.8 million in expenses directly attributable to COVID-19. In fairness to Beyond Meat, there isn’t much the company could have done about the coronavirus pandemic. It came out of nowhere and escalated before there was time to adjust production and distribution channels.
That explains why Beyond Meat also announced last week that it is partnering with Pizza Hut. Pizza Hut will sell two plant-based pizzas with pork and beef substitutes provided by Beyond Meat. Pizza Hut has always done a thriving carryout and delivery business. That business has grown during the coronavirus pandemic.
The Pizza Hut announcement exerted only a slight impact on BYND. That day, shares gained a mere 2.3%, because the revenue from the partnership probably won’t be significant during this quarter. However, it could grow substantially during the first half of next year.
Retail Speeds Up
Overlooked in Beyond Meat’s Q3 results was a 39% increase in retail (grocery) sales compared to last year. Beyond Meat’s food products are sold at just about every major grocer in the United States.
That good news was overshadowed by a 41% drop in sales from its foodservice (restaurant) channel. Beyond Meat’s products are sold by KFC, Subway, Dunkin’ Brands (NSDQ: DNKN), and many other national restaurant chains.
I think the stock market has overreacted to Beyond Meat’s current struggles. At some point next year, its foodservice revenue will start to come back. Many consumers will feel much more comfortable eating indoors at a restaurant after being vaccinated for COVID-19.
Rather than buy the stock, I suggest buying a long-term call option on BYND instead. A call option increases in value when the price of the underlying security goes up.
Last week, while BYND was trading near $125 the call option expiring in January 2022 at the $100 strike price could be bought for $45.
For this trade to be profitable, BYND must rise above $145 within the next 14 months. If it makes it back to $190, where it was trading last month, you would double your money on this transaction.
I like this trade because Beyond Meat has built a better mousetrap. It has also developed several customer channels through which to sell it. I think my Uncle Jimmy would have to agree with me on this one.
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