Is the Beyond Meat Huge Analyst Upgrade Conflicted?

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Beyond Meat Inc. (NASDAQ: BYND) has been the story of the year, when it comes to initial public offerings and the follow-on interest. After pricing its IPO at just $25 per share earlier this year, the lowest the stock has traded has been $45, and its high has been almost $240. Now that its shares have pulled back handily, the meat and protein replacement company taking the food industry by storm is closer to $150, and it’s attracting some interest again.

It was just in June, barely a month after the IPO, that JPMorgan downgraded its rating on Beyond Meat to Neutral from Overweight. The firm cited its lofty valuation at the time, and JPMorgan was one of the two top underwriters in the IPO. The team had even raised its target price to $120 from $97 ahead of its formal downgrade in June. The problem was that the stock already had soared to about $168 ahead of that downgrade, and the company was perceived at the time to have no profits in sight and a valuation that was just too difficult to justify.

Sometimes there is proof that time, and a market and investor selling wave, can heal many wounds. On August 20, JPMorgan reversed its prior downgrade and raised its rating back up to Overweight. Analysts Ken Goldman and James Allen also raised Beyond Meat’s target price to $189 from $188, which compared with a $144.51 prior closing price.

This upgrade could be interpreted in at least a couple of ways. One is that the sell-off created too big of an opportunity for new shareholders to get in. Another interpretation, using Wall Street conspiracy theories as a guide, would be that the analysts are merely bailing out shareholders who had lost about 10% of the value since the recent secondary offering.

One issue that had weighed on Beyond Meat shares was, outside of last week’s harsh market sell-off (its shares fell to $144.20 from $162.90 in a single day), that the company already went back to the markets with a secondary offering. It was no ordinary secondary offering, as it was effectively a release of many locked-up shares, and the company was barely selling any shares. That means insiders and backers were getting out earlier than expected and the company realized no major benefit.

That secondary offering took the shares down from $222 to about $195 on the announcement, and the deal’s pricing of $160 took its shares down as low as under $145 in recent days. Zoom forward to a top investment banker’s analyst upgrade, and Beyond Meat shares were last seen trading up 8.9% at $157.35 — and the 3.5 million shares trading hands in the first hour on Tuesday was only modestly impressive, considering how much the stock was up on the analyst call.

Beyond Meat may not be the first mover in vegetarian meat replacement choices. That said, it has been signing more and more distribution deals, and what it does have is quality. It’s also very expensive to bet against Beyond Meat, as finding shares to borrow for a short sale is not easy, and the cost of borrowing those shares is astronomically high considering that the recent secondary offering added so much more float. At the July 31, 2019, settlement date, Beyond Meat’s short interest was nearly 5.9 million shares.

As for the rating reversal from JPMorgan on Tuesday, August 20, the JPMorgan research team feels the recent sell-off made the shares more appetizing. The company also is expected to be able to keep adding new foodservice customers faster than many of its non-meat competitors, and the company’s latest guidance did not include the addition of Tim Hortons, Dunkin’, Aramark and Uno into that guidance. Ditto for future sales from Subway, Blue Apron, HelloFresh and so forth.

The recent shopping data also indicates that consumers are taking a broader acceptance of the products as it rolls out “sausage” and other alternatives to traditional meats.

Some investors have a hard time factoring in what lower interest rates ahead will do for companies in general, but JPMorgan’s note signaled that a risk-free rate of return at 1.5%, versus a prior rate of closer to 2.5%, adds about $13 per share in its model to the firm’s fair value.

For what it is worth, JPMorgan was with Goldman Sachs and Credit Suisse as lead book-running managers for the recent secondary offering. The shareholders who bought shares at $160 were down almost 10% ahead of this upgrade. Now they are down only about 3%.

Beyond Meat’s post-IPO trading range has been $45.00 to $239.71 and its prior consensus target price was $165.29.


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