Here’s a question:z would you pay 20 times forward revenue for this business?
Yes, look closely, and that’s top line growth of just 3 per cent. The sort of number you might associate with a century-old industrial company clipping along with inflation, like General Motors or General Electric.
But this company is beyond general. In fact, it’s $10bn fake flesh purveyor Beyond Meat. And that table is from its third-quarter results, released Monday night .
As you might expect the stock is down just under 22 per cent to $117 in pre-market trading after missing expectations on both -- surprise surprise -- revenue and net profits.
Tepid revenue growth, which chief executive and founder Ethan Brown put down to the “full brunt and unpredictability of COVID-19”, “retail stockpiling by consumers” and challenges with its food-service customers, isn’t the company’s only problem.
Just take a look at its gross margin:
Yes, its gross margin is down almost 9 percentage points year-on-year. No matter which way you frame it, that’s ugly. Competition from the likes of upstart Impossible Foods and established companies like Nestle is clearly beginning to affect pricing, as well as volumes.
Yet if you look at Beyond Meat’s ridiculous “adjusted gross margin” metric, you’ll spot something else going on: inventory write-offs.
Now, in a fast-growing company with a large total addressable market, you expect inventories to be low as all of its finished product, in theory, should be heading out the door to its eagerly awaiting customers. The only limitation, really, should be supply.
Yet scroll down the press release to Beyond Meat’s balance sheet, and you’ll notice something is up. Or to be more precise: piling up.
Here’s the financial statement:
$132m of inventory sat in Beyond Meat’s warehouses at quarter-end, a 62 per cent rise year-on-year despite revenues only growing 3 per cent.
Mounting inventories is often a sign the company is expecting a big jump in sales in the next few months. However, it can also be a red flag, as Howard Schilit explained in his famous book Financial Shenanigans:
Sometimes a company will stock up on inventory heading into a period of expected increased demand and rapid sales growth. While this may be a perfectly legitimate business strategy, companies use it as a common excuse to justify unwarranted inventory growth. When they are presented with this reasoning as an explanation for increased inventory, investors should determine whether the strategy had been planned before the inventory building, or whether the strategy was hatched as a defensive response to the inventory build-up.
Beyond Meat’s investors will have to ask themselves which story makes the most sense after a quarter in which the company’s once startling growth has come to a sudden stop.
But for a stock trading at 20 times revenues, we’re not sure it’s a question they should be even asking.
Related Links: This is nut loaf, will Beyond Meat crash? -- FT Alphaville Beyond Meat’s shares plunge after consumers slow purchases -- FT