For real-time updates, do join our:
- Telegram Group: t.me/theinvestquest (or search “The InvestQuest” on Telegram)
- Whatsapp Broadcast: Just send “Hello IQ” to +65 8840 2520
- Facebook Page: The InvestQuest | Facebook
- LinkedIn Page: The InvestQuest | LinkedIn
Difficulty: Easy
1) How large is the plant-based meat opportunity exactly?
Our guess is US$91BN/year, on the lower end. We look at plant-based milk industry (e.g. oat/almond milk) to estimate the potential “steady state” market size for plant-based meats, and draw implications for the potential enterprise value of plant-based meat companies.
2) Why this time is different
Meat substitutes have been around for a long time. We looked at reasons highlighted by analysts for why and how this time is different.
3) The Disruptors: Beyond Meat, Impossible Foods, and more
Beyond Meat (BYND NASDAQ) is the only genuine pure-play disruptor that’s listed (Impossible Foods is private). But just because Beyond Meat’s the main option doesn’t mean you should invest in it right now. This is the Greater Lesson to Keep in Mind: Sometimes, it’s easier to pick the losers.
4) The Incumbents: WH Group, Tyson Foods, and JBS
Should plant-based meats catch on in a much bigger way than anticipated, such that the threat they pose to traditional meat producers is tangible, we’d be cautious in holding any of the following stocks as long-term investments. Notwithstanding the above, with respect to short-term returns, we note that WH Group, Tyson Foods, and JBS have already performed badly year-to-date so it might not be the best time to short the stock.
The InvestQuest’s View: In the next few years, we’ll be monitoring this future food trend. If it looks like plant-based eating is the next big wave, we’ll revisit shorting these three traditional meat producers.
We read Bank of America’s (BofA) research primer: “We Can’t Keep (M)Eating Like This – Future Food Primer” published 7 Apr 2020 by Felix Tran and team. You can’t help wanting to read a report when the title is so punny… Credit goes to BofA’s research report for many of the insights, especially in Section 2.
1) How large is the plant-based meat opportunity exactly?
InvestQuest’s View: Our guess is US$91BN/year, on the lower end.
The meat industry made US$270bn in US sales and US$1.4tn in worldwide sales in 2017, according to data from Fitch Solutions Macro Research. This figure consists of estimated sales across retail and foodservice channels.
Meanwhile, sales of plant-based meats stand at ~US$21.1bn in 2020, according to Bank of America.
Given the recent advancements in taste, what’s the steady-state market share that plant-based meat can aspire to? Plant-based milk is a case study in this respect. In the United States, non-dairy milk sales were ~13% the size of dairy milk sales. Granted, those numbers were achieved in a developed country, and may not be as applicable in developing countries. Just to be conservative, let’s halve the market share percentage when we apply it to the global market. So we get 6.5%.
If we apply 6.5% to US$1.4tn of global meat sales, that’s US$91bn in “steady state” sales for plant-based meats. That’s 4x its current market size of US$21.1bn.
Remember, we arrived at this figure using the diary industry as a comparison. If consumer preferences continue to change due to the factors mentioned below, we believe this “steady state” sales figure has room to grow.
So what does this mean for the size of plant-based meat companies? Well, assuming a 15% EBITDA and a ~7.4x EV/EBITDA ratio (average of current meat producers), we estimate that plant-based meat companies could eventually be worth US$101bn in terms of their enterprise value. As a comparison, Beyond Meat currently has an enterprise value of US$8bn.
How long will it take for this “steady state” to be achieved? Our uneducated guess is…around 10 years. Bank of America projects that the sales of plant-based meats will increase from US$21.1bn in 2020 to US$40.6bn in 2025. Still, 300% growth in 10 years seems mighty decent to us, assuming our assumptions hold up.
10 years sounds long. Well, keep in mind that vegetarian meat substitutes have been around for a long time! For instance, Quorn has sold meat substitutes made of mycoprotein since 1985. It takes time for consumer preferences to change, and changing they are.
Here are some recent developments analysts have highlighted to explain why we think the plant-based wave has JUST begun...
2) Why this time is different
Meat substitutes have been around for a long time. We looked at reasons highlighted by analysts for why and how this time is different.
2A) Reason #1: Dramatic improvements in taste
Self-explanatory. Impossible Foods and Beyond Meat have come way closer to replicating the taste of beef patties than the current meat substitutes on the market. Heck, their patties even “bleed”. This dramatic improvement in taste helps to lower the barriers to entry… into people’s stomachs.
2B) Reason #2: Significant cultural change
Vegan just became the cool kid in the room. The chart below shows the Google search queries for Vegan, Vegetarian, Paleo, and Atkins since 2004, worldwide. While queries for Vegetarian have been relatively stable, there’s a clear uptrend for Vegan in recent years.
Recent proliferation of vegan influencers and celebrities on Instagram. There’s been a proliferation of influencers using the platform to promote plant-based eating, some for animal rights, some for health reasons, and several for its apparent weight-loss benefits. Ariana Grande, Miley Cyrus, Natalie Portman are a few of the celebrities that are vegan.
Helped by new blockbuster shows on Netflix. Game Changers. What the Health. Forks over Knives. There’s a new line on documentaries on Netflix that have gotten attention for highlighting practical reasons to go plant-based, beyond the traditional focus on animal ethics.
3 in 4 customers are interested in plant-based proteins. According to Bank of America, there is strong interest and repeat purchase intent for plant-based proteins. 75% of consumers survey (n = 1,408) would consider/have already purchased a plant-based protein option, including ~40% who intend to repeat purchase.
Source: Bank of America Global Research, Social Standards (as quoted in BofA)
2C) Reason #3: Greater awareness of the host of practical reasons to go plant-based
Here are the practical reasons suggested.
For Your Own Health
In particular, we’d highlight that heart disease is the No. 1 leading cause of death worldwide, according to the WHO. And this is especially so in middle to higher income countries. It may surprise some of you to find out that vegetables/fruits have zero cholesterol. (For our Singaporean readers, yes, we double-checked durians do not have cholesterol either! It is, however, incredibly high in sugar, which is still not great for heart disease.) You can read up on one major observational study on the link between a vegan diet and heart disease risk here.
For the Environment
Meat and dairy are generally more resource-intensive to produce than plant-based foods, increasing pressure on land, water, and the climate, according to the World Resources Institute. Small dietary shifts can significantly reduce agricultural use and greenhouse gas (GHG) emissions.
Source: World Resources Institute (WRI) as quoted by BofA
For Other People
The world currently faces a food security issue, and this will only worsen. The UN estimates there’ll be 9.4-10.2 billion people worldwide by 2050 vs 7.8 billion in 2020, meaning that agricultural demand could grow 50% in a business-as-usual scenario (as quoted by the Bank of America). However, growing the food supply will face further global challenges, including limited land left to be cultivated (50% of habitable land is currently used by agriculture) and peak water (agriculture accounts for 70% of current water use), according to FAO, UNEP as quoted by Bank of America. Given how much land and water animal farming takes up, plant-based diets have been highlighted as a potential solution to address at least part of the food security issue.
And to Avoid Zoonotic Diseases?
Amidst the Covid-19 pandemic, it’s been highlighted that zoonotic diseases are behind 75% of all newly identified infectious human diseases over the past decade. As you all already know, Covid-19 likely originated from a bat.
For now, it’s not certain exactly which animals can catch Covid-19 from humans and spread it amongst themselves. The CDC cites a study that suggests that thankfully pigs and chickens do not seem to spread Covid-19, though we note that the sample size used in the study was very small (3 animals each).
After authorities in China traced the origin of a recent COVID-19 outbreak in Beijing to the Xinfadi fresh food market in the city’s Fengtai District, the nearby port of Tianjin has begun testing all meat imports for the coronavirus, threatening to disrupt exports from the U.S. See article.
Yesterday, the BBC reported that a new strain of flu carried by pigs has the potential to become a pandemic. It was recently identified in China by scientists and can infect humans. According to the article, a bad new strain of influenza is among the top disease threats that experts are watching for, even as the world attempts to bring to an end the current coronavirus pandemic.
3) The Disruptors: Beyond Meat, Impossible Foods, and more
Here are the game changing verticals in the Food industry, as highlighted by Bank of America. In particular, the first and the last column are focused on replacing traditional protein options.
Focusing on meat alternatives, here’s a list of traditional meat companies, as well as the disruptors.
Beyond Meat (BYND NASDAQ) is the only genuine pure-play disruptor that’s listed. Impossible Foods is still privately held. Boca is owned by Kraft Heinz (KHC NASDAQ). MorningStar Farms is owned by Kellogg (K NYSE). Gardein is owned by Conagra (CAG NYSE). LightLife is owned by Maple Leaf Foods (MFI TSE). Meanwhile, Memphis Meats, Meatable, Mosa Meat, SuperMeat, and Finless Foods are all privately held.
There are a smattering of very small listed companies that sell plant-based alternatives. They are Burcon Nutrascience (BU TSE), which develops plant-based proteins, and Else Nutrition (BABY CVE), which sells plant-based baby products. But they’re currently just not in the same class as Beyond Meat.
But just because Beyond Meat’s the main option doesn’t mean you should invest in it right now. Analyst ratings on the stock show a strong tilt towards SELL. The valuations are currently around 17x FY20F Price-to-sales. The stock’s down 11% today alone! It’s very volatile. Plus, personally, I do prefer the taste of an Impossible patty quite a lot more than a Beyond patty. (Player 1, who used to be a very active food blogger in the teen 2000s, also agrees with my sentiment!!) IQ might still consider buying the stock in the future, but we’re holding off for now.
If you still want to find out more about Beyond Meat (and Impossible Foods), head down to our appendix, where we have pretty charts.
The Greater Lesson to Keep in Mind: Sometimes, it’s easier to pick the losers. Below we have a quote from Buffett. The main point is that in times of significant industry transformation, it’s often tough to tell which company is going to be the winner, these “winning” companies may not necessarily be great stock investments (maybe due to price wars etc.), and that it’s simply much easier to figure out who’s on the losing end.
If you want to have a look at the meat industry’s current incumbents, check out section 3.
4) The Incumbents: WH Group, Tyson Foods, and JBS
We’ve highlighted three meat producer incumbents.
Should plant-based meats catch on in a much bigger way than anticipated, such that the threat they pose to traditional meat producers is tangible, we’d be cautious in holding any of the following stocks as long-term investments.
Notwithstanding that, with respect to short-term returns, we note that WH Group, Tyson Foods, and JBS have already performed badly year-to-date (-18%, -33%, -21% respectively). Plus, it seems that analysts for all three stocks are generally bullish.
By comparison, the S&P500 is down 5% year-to-date and Beyond Meat is up 74%.
In the next few years, we’ll be monitoring this future food trend. If it looks like plant-based eating is the next big wave, we’ll revisit shorting these three names.
WH Group (288 HKG)
WH Group is the largest pork company in the world, with number one positions in China, the U.S. and key markets in Europe.
From Bloomberg: WH Group is struggling to cope with the virus that causes African swine fever (ASF), a deadly malady that’s devastated hog herds and helped more than double pork prices in China, while also spreading to other countries in Asia and Europe. Like Covid-19, ASF is currently incurable and researchers have yet to come up with a vaccine. China’s pork production fell 29% in the first three months of 2020; the swine disease has slashed the size of the country’s hog herd by about half. See article.
From Bloomberg (continued): Now the coronavirus is piling on. Smithfield Foods, the Virginia-based subsidiary of WH Group, shut three of its U.S. plants this month because of Covid-19. They include a processing facility in Sioux Falls, S.D., that accounts for about a quarter of the company’s U.S. revenue. See article.
100% of the analysts who cover the stock have a BUY rating, with an average projected upside of 55%.
JBS (JBSS3 B3)
JBS is a Brazilian company that is the largest (by sales) meat processing company in the world, producing factory processed beef, chicken and pork, and also selling by-products from the processing of these meats.
Yesterday it was reported that the JBS poultry plant in Passo Fundo must re-close, after it had been authorised to reopen on 21 May (as reported by Reuters). It had been closed on 24 April to stem the spread of a coronavirus outbreak among plant workers.
As of 23 June, almost 5,000 workers at meat plants had tested positive for the novel coronavirus in Rio Grande do Sul, or 25.14 percent of the state’s total 19,710 cases, the labour prosecutors said.
For the Brazilian listing, the company has the following analyst ratings: 88% Buy, 6% Hold, 6% Sell. Average upside of 59%.
Tyson Foods (TSN NYSE)
Tyson Foods is the world’s second largest processor and marketer of chicken, beef, and pork after JBS S.A. and annually exports the largest percentage of beef out of the United States.
The company has been in the news for Covid-19 lapses. In an egregious example, local health officials announced that 730 out of 1,250 workers at Tyson’s plant in Perry, Iowa had tested positive for coronavirus.
In June 2020, ProPublica reported that more than 24,000 coronavirus cases were tied to meatpacking plants, with 87 deaths among meatpacking plant workers. Of those 87, more than 25 worked for Tyson. Well after outbreaks had occurred, Tyson did not implement recommended safety measures to protect its workers, such as social distancing, plexiglass barriers and wearing of face masks.
On June 21, the government of China announced that it was suspending imports of chicken from a Tyson factory. See article.
Notwithstanding its alarming Covid-19 lapses, we do note that Tyson introduced the company’s first plant-based and blended products in June 2019, under its new Raised & Rooted® brand.
Analyst ratings: 69% Buy, 31% Hold, 0% Sell. Average upside of 27%.
APPENDIX: BEYOND MEAT
The InvestQuest’s View: Explosive growth. AND the only true disruptor that’s listed right now. But based on a preliminary look, we’re not particularly inclined to invest in it right now. Some reasons: 1) Analysts aren’t too fond of it right now, with a tilt to SELL ratings 2) It’s already trading at a 17x forward Price-to-Sales, which is steep by any measure and 3) We prefer the taste of Impossible! Maybe we’ll revisit it at a later point.
Analyst Ratings: 15% Buy, 45% Hold, 40% Sell. -26% Average Upside.
Note: Please forgive the typos below! It’s Beyond Meat not Beyond Meats.
APPENDIX: IMPOSSIBLE FOODS
Since Impossible Foods is privately owned, we don’t have much information on it.
However, it did announce a US$500m funding raise in May 2020. The raise was led by Mirae Asset Global Investments, a new investor. Existing investors Khosla Ventures, Horizon Ventures and Temasek also participated in the round.
This latest funding round brought the company’s valuation to nearly US$4bn, according to Reuters. As a comparison, Beyond Meat’s market capitalization stands at US$8.2bn, as at 29 Jun 2020.
Be the first to comment