Going meatless, either through vegan or plant-based food, is a big trend, and it just found the biggest platform from which to announce its arrival. The 77th annual edition of the Golden Globes last Sunday will be remembered as much for the host Ricky Gervais’ savage monologue as for its menu featuring 100% plant-based meal.
As more consumers opt for meat alternatives -- driven by concerns and care for health, animal welfare and the environment – food companies are rolling out their meatless meal offerings as substitutes for a wide variety of animal-derived products. These companies, and their bottom lines, are getting tremendous support from consumers, which now include large chains of quick-service restaurants. Plant-based substitutes have also got a ringing endorsement from celebrities including Leonardo DiCaprio, Bill Gates, Jay Z, Serena Williams, and Katy Perry, who have put their money where their mouth is by personally investing in non-meat startups.
For long-term investors, regardless of their dietary preferences, this represents a brand-new investment opportunity. While more companies are expected to join the plant-based food bandwagon, these companies have a head start and are expected to control much of the plant-based meat alternatives market, which Morningstar projects will grow from US$5 billion in 2018 to US$48 billion by 2029.
| Beyond Meat Inc | |
| Ticker | BYND |
| Current yield: | |
| Forward P/E: | 285.71 |
| Price | US$75.47 |
| Fair value: | US$62 |
| Value | 22% premium |
| Moat | None |
| Moat Trend | Positive |
| Star rating | ** |
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Data as of Jan 03, 2020 |
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A pioneer in plant-based meats, or PBMs, Beyond Meat (BYND) offers burgers (70% of sales), ground beef, sausage, and chicken that replicate the look, cook, and taste of meat. Its products are widely available at retailers, college campuses and fast-food restaurants across the U.S., Canada, and parts of Europe, Asia and Latin America.
Beyond Meat is in hyper-growth mode as the global PBM market continues to skyrocket, “driven by the 20% of the population willing to adjust their daily habits in order to benefit the environment,” says a Morningstar equity report.
Beyond Meat is well positioned to benefit as PBMs continue to poach on the larger market for animal-derived foods. Beyond’s brand continues to win with consumers, given its strong performance in taste tests and ongoing R&D investments,” says Morningstar equity analyst, Rebecca Scheuneman, who projects the company’s PBM market share to increase from 1.9% in 2018 to 6.5% in 2028. It is projected to clock triple-digit revenue growth in 2019 and 2020, led by additional retail distribution and restaurant deals, particularly “a deal to supply North American McDonald’s restaurants in 2020, which we expect to add US$400 million in annual revenue,” says Scheuneman, who pegs the stock’s fair value at US$62.
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Conagra Brands Inc |
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| Ticker | CAG | |
| Current yield: | 2.53% | |
| Forward P/E: | 16.13 | |
| Price | US$33.40 | |
| Fair value: | US$32.50 | |
| Value | Fairly valued | |
| Moat | None | |
| Moat Trend | Negative | |
| Star rating | ** | |
| Data as of Jan 03, 2020 | ||
Conagra Brands (CAG) is a packaged food company that operates predominantly in the U.S. (92% of revenue and 94% of profits). It has a significant presence in the freezer aisle, with brands such as Marie Callender’s, Healthy Choice, Banquet, and Birds Eye. While most of the revenue comes from the U.S. retail channel, 11% of sales are generated form the food-service channel.
The company recently made big push into the fast-growing meatless alternatives market by acquiring Pinnacle Foods, a company that owns an enviable portfolio of plant-based protein products.
The move is expected to offset effects of continuing headwinds on most of the firm’s revenue base built on traditional food and snack products, says a Morningstar equity report.
Although Conagra maintains many market-leading brands, which makes it an important partner to retailers, more than half of “Conagra’s revenue base is in secular decline, as it is represented by highly processed fare, which consumers have been shunning,” says Scheuneman, who recently raised the stock’s fair value from US$32 to US$32.5, promoted by improved cash flow generation.
In addition to placing a big bet on faux meat products, the company is countering revenue weakness by shedding non-core brands. “We consider the move a step in the right direction,” says Scheuneman, who expects the proceeds to reduce debt and invest in brands strong enough to command pricing power.
| The Hain Celestial Group Inc | |
| Ticker | HAIN |
| Current yield: | - |
| Forward P/E: | 35.21 |
| Price | US$25.89 |
| Fair value: | US$26 |
| Value | Fairly valued |
| Moat | None |
| Moat Trend | Stable |
| Star rating | *** |
| Data as of Jan 03, 2020 | |
U.S. organic food company, Hain Celestial Group (HAIN) is a natural food producer spanning North America, Europe and India. The company generates 74% of revenue from grocery, 13% snacks, 8% personal care, and 5% tea. One of the earliest adopters of meatless and vegan alternatives, it offers a range of meatless snacking and meal options including burgers, ground “meat”, hotdogs and sausages sold under the Yves Veggie Cuisine brand.
Hain’s other plant-based offerings include beverages and snacks that benefit from the growing demand for healthier, plant-based alternatives. In recent times, the company has struggled with intense competitive pressures and mismanagement, says a Morningstar equity report, but adds the company “is embarking on a significant restructuring plan in the U.S.” As part of turnaround, the report adds, it aims to drop unprofitable products from its lineup, crimp unproductive promotional spending, improve focus on higher-margin products, and cut costs to improve revenue growth and profitability.
Hain plans to allocate the bulk of its resources to the 11 brands that account for 50% of segment revenue and 90% of profits, says Scheuneman, who appraises the stock’s worth to be US$26.
| Nestle SA ADR | |
| Ticker | NSRGY |
| Current yield: | 2.24 |
| Forward P/E: | 22.8 |
| Price | US$109.31 |
| Fair value: | US$93 |
| Value | 16% premium |
| Moat | Wide |
| Moat Trend | Stable |
| Star rating | ** |
| Data as of Jan 03, 2020 | |
The world’s largest food and beverage manufacturer, Nestle (NSRGY) owns a diverse product portfolio with brands such as Nestle, Nescafe, Perrier, Pure Life, and Purina. The more than 150-year-old company’s vast product portfolio includes 34 brands that each rack up more than CHF 1 ($1.3) billion in sales annually.
With an eye on the burgeoning market for meat alternatives, Nestle scooped up plant-based food producer Sweet Earth. The Swiss giant recently launched faux meat products in the U.S and Europe gearing up to take a slice of the exploding global plant-based substitutes market.
“The new management team has put a lot of weight on reinvigorating growth (mid-single-digit target by 2020) through active portfolio management (acquiring or divesting businesses), resetting fixable base businesses, and further investment in high-growth categories,” says Morningstar equity analyst Ioannis Pontikis, who recently upped the stock’s fair value from US$88 to US$93.
Nestle’s wide economic moat, or sustainable competitive advantage, is built on its entrenched position with retailers and a durable cost edge that’s tough for new entrants to match.
