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Sunday, June 26, 2022

Interested in Taking a Bullish Position in Beyond Meat? Here’s How to Play It

Late on Tuesday evening, the KFC unit of Yum! Brands (YUM) announced the January 10th launch – for a limited time – of “Beyond Fried Chicken.” Participating KFC locations will start selling this plant-based, meatless chicken substitute a la carte, in meal combos and in six and 12 piece buckets. The partner, as you have likely guessed by now, is Beyond Meat (BYND) . The stock popped overnight on the news.

This story goes back a little. This past September, KFC U.S. President Kevin Hochman revealed to the public that KFC was working with Beyond Meat to perfect their chicken product. Don’t forget that KFC tested Beyond Meat plant-based chicken in Atlanta in 2019, and then in Nashville, Charlotte, and southern California in 2020. Beyond has an overarching forma partnership with YUM to produce meat substitutes for all of the Yum chains. This includes KFC as well as Taco Bell and Pizza Hut.

Citing a piece written by Alexandra Canal at Yahoo Finance, U.S. plant based food sales grew twice as fast as animal-based food sales in 2020, with these sales reaching $7B. Within the broader plant-based category, meat substitutes accounted for more than $1B, which was good for 45% growth from 2019. In addition to deals with YUM, Beyond Meat has deals in place with Dunkin’, TGI Friday’s, Costco (COST) , Subway, and McDonald’s (MCD) for the much anticipated McPlant Burger. Impossible Foods, which is Beyond Meat’s chief rival in the space is/has done business with Starbucks (SBUX) , the Burger King unit of Restaurant Brands (QSR) , and The Walt Disney Company (DIS) as a provider of plant-based meats to the firm’s resort areas and cruise lines.

In other news, two weeks ago, Beyond Meat announced that the firm had finalized the lease for a new research and development center in Shanghai as part of a larger global expansion strategy. This will be Beyond Meat’s first dedicated R&D facility outside of the U.S., and will serve as a hub for innovation.

Not So Impressed

Analyst Peter Galbo of Bank of America is out warning about a slowing rate of growth for the meatless category at retail (groceries) locations, as well as uncertainty around a successful McPlant rollout at McDonald’s. Galbo has a “sell” rating on BYND, and stuck to his guns as the stock did rise in price and then fall back to earth. He has a target price of $55 on the shares. Piper Sandler’s Michael Lavery remains “bearish on key fundamentals” regarding BYND. He sees the firm’s outlook for margin as “unfavorable”. Lavery has a “neutral” rating on BYND with a $64 target price. Both analysts seem to make some sense to me. That said, BYND bulls can take solace that TipRanks does not rate either of these two analysts all that high.

Fundamentals

Not awful. The balance sheet is okay. Total assets less equity are not all that much larger in size than total liabilities. That said, the firm has almost no current liabilities. The debt load is sizable, larger than the firm’s net cash balance by a wide margin. However, this debt is all long-term debt and the firm has almost no other liabilities. Their current ratio, for that reason, is quite robust. Beyond Meat is not going away.

Earnings are due in late February. Wall Street expects to see a loss of $0.68 per share, which will be a seventh consecutive quarter of lost money. Revenues are expected to print at a rough $102M, which would be flat year over year, and down small sequentially.

My Thoughts

The good news for those long the stock would be that if this was the bottom (for now) then almost all of your favorite moving averages as well as glaring unfilled gap in between the $85 and $93 levels are to your north. I threw a Fibonacci model on BYND’s year long melt-down, but in all honesty, this firm has a lot of wood to cut before reaching out for a 38.2% retracement. Even a 23.6% Fib retracement (which I can not show here) is a little bit of a stretch at $98, but that I think has to be your goal as it would also fill the gap.

Realizing that McDonald’s is trying to introduce McPlant later in the first quarter, a trader interested in taking a bullish position at reduced risk could put on a diagonal call spread. Using minimal lots for the purposes of explanation, a trader could…

– Purchase one BYND April $70 call for a rough $5.10.

– Sell (write) one BYND March $75 call for about $3.80

Net debit: $1.30

Note: Not a fancy trade. Profits could be maxed out at $3.70 if the trader is called away in March, and is then technically short 100 shares at $75, knowing that he or she can buy them back at $70 in April. Of course if the shares are not called away in March, the trader just has to root for BYND to climb above $71.30 (strike price + net premium paid) by April expiration. If the shares just never rally, the trader is out the $1.30.

(Costco, Starbucks and Disney are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

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