Hey Bow Tie Nation, Joseph Hogue with the Let’s Talk Money channel and a special video for you today. One of the hottest investments last year was Beyond Meat with its stock surging 260% from the IPO. We’ve gotten a lot of questions from you in the Nation about investing in plant-based foods and I’ve been wanting to do a video for a while.
So I’ve been trying to line up an expert to talk to us about plant-based meats and how to analyze these stocks. This market is expected to reach $27.9 billion by 2025 for annualized growth of 15% from 2019. More than half the population, about 55% of Americans, say they’ve added plant-based foods to their diet with 19% consuming regularly.
More surprising though is that 89% of those eating plant-based meats say they’re also still eating traditional meats, so this goes way beyond that vegan or vegetarian diet into what the industry is calling the flexitarian diets.
So today I wanted to get you the inside information on investing in plant-based foods like Beyond Meat. We’ve got an interview with Mitchell Scott, CEO of the Very Good Butchers Company, a Canadian plant-based meat company trading with ticker VERY in Toronto and on the U.S. OTC market as ticker VRYYF. I’m also going to run down some of the fundamentals, growth and what to look for investing in this trend so stick around after the interview for that.
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How to Invest in Plant-Based Foods Stocks
Mitchell, thank you for joining us and sharing your insight into investing in plant-based foods.
Talk to us about the growth in the industry; how is the industry at large and Very Good Butchers working to expand the market, where are you seeing the most opportunity in growth?
- While the plant-based foods segment isn't entirely new, momentum is building as people adopt the diet for different reasons from health, environmental and ethical reasons.
- It seems like the industry is building to that critical mass of people adopting the diet, especially with the quick-service chains like McDonald's and others putting items on the menu.
What does distribution look like for companies in the plant-based market look like? Where are you focusing in breaking through and where are the challenges? For example; direct-to-consumer retail, online, wholesale and restaurant?
- The Very Good Foods Company started with a three-part distribution strategy; online, retail and wholesale. This was particularly helpful because when COVID-19 struck, we already had a strong online distribution model so were able to increase sales.
- The broader plant-based foods market is growing quickly with quick-dining restaurants and wholesale sales increasing rapidly.
Related to that, I see the company increased sales to $1.4 million in the six months to June of this year, a 226% increase from the same period last year, but you note 50+ wholesale customers on your wait list. How are you expanding production to service the market and can you give us any proforma targets for full-year sales or growth?
- We are trying to grow responsibly and adding customers as we can. We are adding production capacity quickly but want to make sure we are able to service customers before making commitments.
- We have capacity production up to 1.3 million pounds a year at our Victoria facility and have secured a location for our Vancouver facility with a production capacity of up to 5.0 million pounds per year.
Talking about the broader market here, the company reported a gross margin of 42% in June, Beyond Meat books a 33% gross margin and I see a traditional processor Tyson Foods only books an 11.8% gross margin. Why is this difference in gross margins so large between the plant-based companies and the traditional processors?
- This is really a function of the different inputs between plant-based and traditional meats. For us, it is much less costly to buy the beans and vegetables that go into our product compared to traditional meat processors that have all the costs that go into raising livestock, slaughtering and processing meats.
Contrasting that now with the operating margin for plant-based companies which is much lower, or negative, and a 6.7% margin for Tyson. I’m assuming a lot of this is higher marketing as well as R&D for your industry but expand on that a little and what Very Good Foods is doing to improve its margin.
- Right now we're still in that growth phase where we're ramping up production to meet demand but trying to do it at a responsible cost.
Something every investor is asking this year, how has COVID-19 affected your company as well as the broader plant-based industry?
- We were fortunate that our online distribution was setup and working ahead of the pandemic. That allowed us to boost sales quickly through that channel.
- Our retail butcher and cafe did take a hit during the lockdown though we did not close down completely. Instead we were able to shift to a delivery model to keep selling product.
Stick around because we’re going to look at some analysis on investing in plant-based foods but I want to thank our guest, Mitchell Scott, CEO of Very Good Butchers; trading under the Very Good Food Company on the Toronto exchange, ticker VERY, and in the U.S. under ticker VRYYF, and look for that link in the video description below to learn more about the company.
Plant-Based Foods Analysis
So there is a lot of growth ahead for plant-based meat companies like Beyond Meat, Impossible Foods and Very Find Foods. In fact, that 15% market growth expected through 2025, that compares to an annual decline of 1.7% in the traditional meat category so this is really where the only growth is in meats. And that’s why we’ve seen competition heat up even from the larger traditional processors like Tyson, ConAgra and even Kellogs.
Most of the major quick-service restaurants have added plant-based foods to the menu including McDonald’s, Burger King…even Starbucks has announced a menu item.
For the newer companies like Very Good Foods, and even the established players like Beyond Meat, I think a lot of it is going to hinge on brand building, retail and wholesale partnerships. There doesn’t seem to be a production capacity problem, as we saw Very Good is ramping production up to potentially five million pounds annual capacity at its Vancouver facility alone. So I like that the company has placed partnerships with 112 retailers including Whole Foods, Fresh Street Market and Choices.
Of course, when you’re looking at these growth stocks, you always want to look at trends in their margins. As I mentioned, Beyond Meat has a gross margin of 33% and an operating margin of 1.4% so you want to keep an eye on that each quarter to see how it’s doing to lower costs and become more profitable. Shares of Beyond Meat are trading for about 20-times on a price-to-sales basis which is high compared to most traditional food processors which trade around one or two-times sales but also well below the 130-times sales where the shares were last year.
For its part, Very Good Foods has a $96 million market cap and trades for roughly 30-times on a price-to-sales basis. It’s reporting a 42% gross margin, so better than Beyond Meat by quite a bit. The company reported $3.2 million in operating expenses in the six months to June which means it’s still negative earnings so I would be watching for that sales growth and growth in operating costs for a profitability trend. Basically you want to see that sales are growing at a much faster rate than operating costs so you can get the company to earnings profitability.
Check out the Very Find Foods company, that’s ticker VERY on the Toronto exchange and VRYYF on the U.S. OTC exchange. Don’t forget to join the Let’s Talk Money community by tapping that subscribe button and clicking the bell notification.