The Update Issue: Beyond Meat, Carnival, and Facebook

By Berna Barshay

Friday, September 4, 2020
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Editor’s note: The Empire Financial Research offices are closed for Labor Day. Look for your next Empire Financial Daily on Tuesday. Have a great holiday weekend.


Sales results at Beyond Meat (BYND) increased my conviction that the company has big – and profitable – growth ahead…

Last month, the alternative-meat maker reported second-quarter sales numbers that were 14% ahead of analyst expectations, despite the upheaval caused by the COVID-19 pandemic. The widespread closure of restaurants in the quarter caused commercial sales to foodservice to plunge a massive 61%. Even with this giant headwind, Beyond Meat still achieved overall revenue growth of 69%, thanks to a 195% surge in sales to grocery stores.

While the 69% topline growth is a big deceleration from the 141% the company put up in the first quarter, this is impressive when you consider that foodservice represented just over half of sales in 2019.

Beyond Meat made a quick pivot to repackage bulk product intended for restaurants and cafeterias into smaller, consumer-oriented packaging as it reallocated inventory from commercial to retail distribution. This cost the company slightly more than $7 million in the quarter and pushed it slightly into the red. But these costs were indeed pandemic-related and one-time… without them, Beyond Meat would have eked out a small gain.

This one-time cost will probably prove a good investment. Wide availability of the product in grocery and club stores will encourage more consumers to try it, and I’m betting that many folks who try it will like the product and buy it again. According to financial-services firm Wells Fargo (WFC), household penetration of Beyond Meat products sits around 5% now, up from 2% a year ago. That’s a big jump in trial and awareness… but at 5%, it’s still very much the early innings.

As I explained in my original recommendation of this expensive stock – which makes it an atypical pick for me – only 10% of the global meat market needs to go plant-based… and Beyond Meat only needs to capture 10% of that plant-based market for its stock to be a winner. The tripling of sales in the grocery channel this quarter has me more confident that the company can get there over the next decade.

In mid-August, reports emerged that rival plant-based meat company Impossible Foods had raised another $200 million to grow its business…

This is likely another sign that we’re in the early innings of an explosive growth opportunity in plant-based meat.

When reading about the venture capital round, I learned that Temasek, the sovereign wealth fund of Singapore, is one of the backers of Impossible Foods. This is interesting… Temasek has been a savvy investor over time, and its participation is a positive signal that the plant-based meat market could have a big future in Asia, as well as Europe and the Americas.

Turning back to Beyond Meat… After reporting a solid second quarter, Beyond Meat closed out August with the launch of an e-commerce site selling directly to consumers. The site will enable product trial for customers not near a Beyond Meat retailer and the solicitation of direct customer feedback about products.

Despite these positive developments, Wall Street remains highly skeptical of BYND shares due to their high valuation.

However, Beyond Meat gained one new fan yesterday… Institutional broker Baird launched coverage with a “buy” rating and $160 price target. The analyst cited Beyond Meat’s large addressable market, and – like me – thinks these are the early days for the plant-based meat industry. He compared Beyond Meat’s positioning to that of electric-car maker Tesla (TSLA) and noted that alternative protein is still a tiny fraction of the meat market, just like electric vehicles make up few of the cars on the road globally.

Including this new recommendation, just four Wall Street analysts currently recommend BYND shares. This represents just 17% of analysts covering the stock, which is a low percentage of “buys” versus the average stock at around 60%. Given the growth potential and management’s nimble and impressive operational execution so far, I think more analysts will eventually come on board, which would be a catalyst for the stock. So far, BYND shares are down roughly 5% since my recommendation in late July.

Cruise operator Carnival (CCL) is a great case study in how the U.S. Federal Reserve is influencing borrowing costs…

In the August 27 Empire Financial Daily, I wrote about the Fed’s tight grasp on the yield curve and extreme levels of intervention that are causing “junk” bond spreads to tighten.

One company that provides an excellent illustration of this is Carnival, where I’ve previously predicted a slow bounce back in profitability.

Carnival is currently rated “BB-” by Standard and Poor’s (S&P). Per S&P’s definition, this rating indicates that the company is somewhat vulnerable to “adverse business, financial, and economic conditions but currently has the capacity to meet financial commitments.”

Back on April 1, when Carnival had a “BB” rating (moderately better than its current level), the company issued three-year debt at just under a 12% yield. It was widely reported at the time that Carnival was looking at offers for debt at a 15% rate, but the cost dropped when the Fed announced that it was prepared to buy investment-grade corporate bonds in the open market.

In its most recent deal on August 14, completed when it was rated BB-, Carnival paid just under 10% for seven-year debt. Borrowing for seven years almost always should cost more than borrowing for three years. Additionally, BB- companies pay more to borrow than BB companies. Things clearly haven’t surprised to the upside in terms of Carnival’s near-term prospects, otherwise the company wouldn’t have been downgraded by the ratings agencies. It’s 100% due to the Fed’s intervention into the capital markets that Carnival paid 10% recently versus 12% in April.

The good news here is that Carnival gets to live on and fight another day, and fewer employees get fired for now. CCL shares have also more than doubled from $8 around the time of the first debt deal to the current quote of roughly $18. That’s a far cry from their pre-pandemic price of $50, but the Fed no doubt threw the company a lifeline – allowing Carnival to raise the debt it needed to wait out the pandemic at a much lower cost than it would have paid otherwise.

The value of lower-cost emergency debt funding will ultimately accrue to shareholders should Carnival survive and once again thrive post-pandemic. In the meantime, debt investors are forced to accept a much lower rate than normal to fund the struggling company.

The Fed intervention has prompted many macro watchers and currency traders to accuse the central bank of socialist monetary policy, as it has superseded the free markets for the time being in the interest of propping up the economy (particularly the weakest large companies). This activist, interventionist Fed has currency traders on edge, and is another reason why we’re seeing a weaker U.S. dollar.

Facebook (FB) is still struggling to moderate content, with potentially lethal consequences…

Back in July, I wrote about the tenuous balance that the social media giant is trying to maintain between promoting free expression and responsibly moderating content. Failure to identify and remove groups engaging in hate speech and catering to militias, conspiracy theorists, and white supremacists was at the core of the mass advertiser boycott that month.

It looks like Facebook still has a lot of work to do. On August 23, a police officer in Kenosha, Wisconsin shot Jacob Blake, a 29-year-old black man seven times in the back, in front of Blake’s three children. Protests broke out over the shooting. On August 25, 17-year-old militia member Kyle Rittenhouse traveled from Illinois to Kenosha with a semi-automatic rifle. He is accused of murdering two protesters and injuring a third.

On August 26, tech site The Verge stated that at least two separate Facebook users had previously reported the “Kenosha Guard” Facebook group for inciting violence. Moderators reviewed the group and its planned counter-protest event but concluded neither was in violation of Facebook’s community standards.

As one anonymous user recounted…

There were lots of comments like that in the event… People talking about being “locked and loaded.” People asking what types of weapons and people responding to “bring everything.”

Facebook told Business Insider that the two warnings failed to “make it to the team that deal with militia-related content.” Why the content didn’t meet the threshold for escalation wasn’t clear.

Nine hours after the murders of the protesters, Facebook removed the Kenosha Guard group for violating its Dangerous Individuals and Organizations policy, but the damage had already been done. Facebook also removed the accounts of accused shooter Rittenhouse from both its namesake site and Instagram.

Bowing to severe criticism from his own employees, CEO Mark Zuckerberg held a companywide meeting in which he attributed the failure to remove the Kenosha Guard page to operational error.

I don’t think this is material to the price of FB shares, just as I think the boycott won’t cause a significant hit to Facebook’s third-quarter revenues. But Congress and foreign regulators clearly have the company in their sights, so Facebook would be wise to get better at shutting down these violent groups before something tragic happens, rather than after. Zuckerberg’s staff agrees. As one company employee posted during Zuckerberg’s video address…

We need to get better at avoiding mistakes and being more proactive… Feels like we’re caught in a cycle of responding to damage after it’s already been done rather than constructing mechanisms to nip these issues before they result in real harm.

With each Kenosha, the pressure that regulators could come knocking increases.

Elsewhere, concerns over myocarditis in college athletes with COVID-19 are building…

In Tuesday’s issue on college football, I wrote about how fear of myocarditis – inflammation of the heart muscle – was a factor in keeping some conferences off the field this fall.

In a meeting with the school’s Board of Directors, the Penn State Director of Athletic Medicine indicated that approximately 15% of COVID-19-positive athletes at the school displayed myocarditis, which can be fatal if left untreated. It’s too early to know whether the heart condition is temporary or will prove permanent, but to see such a serious condition develop in young people in exceptional shape – most of whom are asymptomatic – is alarming… and inserts further risk into the college football season. You can read more about it here.

Finally, Hollywood has restarted production, but it’s a bumpy road back…

After nearly six months of shutdown, both TV and films are shooting again. However, several productions have had to pause soon after starting due to the detailed safety protocols the industry put in place.

Production on the superhero reboot The Batman resumed on Monday, only to get shut down again yesterday after the film’s star, Robert Pattinson, tested positive for COVID-19. With only one-quarter of the film shot, delays beyond a few weeks could push the release into 2022, versus its current release date in October 2021. A trailer for the film dropped two weeks ago and has been viewed 21 million times. I would have said we don’t need any more Batman movies, but after this teaser, I’m changing my mind. You can see it here.

In today’s mailbag, some reactions to the reading list I shared last Friday…

Carnival’s return to the seas has been postponed again. Ships are docked through September… Would you sail with them when they restart in October? Do you think Facebook should be doing more to moderate hateful, violent, or untruthful content on its site? Do we really need more Batman movies? Send an e-mail with your thoughts to [email protected].

► “Berna, thanks for your daily reads. Like you, I find myself reading half of the day to wisely manage my own (not that large) portfolio. I have always been busy managing my own small CPA firm and various rental real estate properties. The CPA license requires some reading, but nothing like I have done this year as I have turned my focus to the market and slowly begun liquidating the residential rentals to invest more in the market. I have one commercial property that is a real home run. I’ll hold on to that one.

“Between subscriptions to Empire and Stansberry, and other daily reading, I almost struggle to keep up with my business. But it looks like this year, I am on track to make more on my portfolio investments than my business. The reading is key to that.” – Tim L.

► “Berna, thank you to you, Whitney, and Enrique for openly sharing what and how you read. There’s so much to read out there… can’t guzzle fast enough. Something I’m trying to ingrain in my kids too – Warren Buffett’s quote (https://youtu.be/y3gBNBtJMJw?t=300) in cartoon – ‘The more you learn, the more you earn’.” – Michael C.

► “Dear Berna, I’m a new subscriber to Empire. Everything I have read from you, Whitney, and Enrique has been very informative and useful.

“Today I liked the presentation of news sources and how you manage the black hole of reading. I would appreciate practical tools for implementing your recommendations, to keep the hours per week monitoring my positions to a minimum.

“Here’s a topic: I am in my late 60s and have never been a trader, and I don’t want to spend my time learning options, covered calls, worrying about trailing stops.

“How do I easily track all the positions, and set trailing stops without manually setting up spread sheets? I trade through Schwab and I haven’t figured out how to automate my portfolio management. I spent too much money subscribing to TradeStops. My portfolio is too small to justify a Bloomberg terminal!” – David B.

Berna comment: David, I don’t use trading stops on my positions, so I don’t have a personal recommendation for you. I asked around, and one colleague said TradeStops, which you used, is by far the best of these services, and added you can probably find a free version with less features on Yahoo Finance or Google Finance.

Another friend noted that Schwab has features on its platform that could be helpful, and if you give customer service a call, someone can walk you through them for free. Schwab will also probably point you to webinars or videos discussing these features if you call.

Regards and happy Labor Day weekend,

Berna Barshay
September 4, 2020

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.