Beyond Meat surges after JPMorgan gives it an elusive buy rating

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  • JPMorgan upgraded Beyond Meat to "overweight" from "neutral," making it the first firm in months to give the shares a positive rating.
  • Beyond Meat shares rose 9% in early trading on the news.
  • The JPMorgan analyst that covers the stock say its recent share declines and solid operating performance have made it more appealing.
  • Watch Beyond Meat trade live on Markets Insider.

Beyond Meat is out of neutral rating territory, at least in the eyes of one analyst that covers the stock.

Shares of the plant-based meat company gained as much as 9% in early trading Tuesday after Ken Goldman at JPMorgan upgraded the stock to "overweight" from "neutral."

He cited three main reasons for the upgrade: Beyond's potential to acquire new customers in food service, continued strength in its measured data, and valuations. Each one is outlined below.

(1) More opportunities for food service partners

Beyond Meat has a number of high profile partnerships in the food industry, and has continued to add new partners at a quick clip. The latest guidance, Goldman wrote, only includes customers who are past the company's testing stage. This means that sales from Beyond products in Tim Hortons, Dunkin' Donuts, Aramark, and Uno, are not included in the current outlook.

Going forward, Goldman said that he expects at least one or two additional partners to begin testing Beyond products by the end of the year, which is also not included in the guidance. Because of this he thinks the "potential for sales to keep beating consensus estimates is legitimate."

(2) Measured data strength

Goldman has also kept a careful eye on Nielsen takeaway data for Beyond Meat products in retail settings. In the last 13 weeks, the dollar takeaway for the company was up 186% year over year, the highest in nearly three years, he said. That's encouraging, Goldman wrote, "as it suggests the products are catching on with consumers."

In addition, Nielsen data show that Beyond's sausage product continues to drive growth as well. This suggests that Beyond Meat isn't a "one-trick burger pony."

(3) A more attractive valuation

Goldman downgraded Beyond Meat in June after the stock soared 69% in two days while the S&P 500 gained 2%. Since then, Goldman wrote, the fundamentals have improved greatly - earnings have been strong and Nielsen trends show positive signs, the company has signed new customers, raised its guidance, and the stock has declined by roughly 40%.

Interest rates have also fallen, Goldman said, which helps the valuation as well. "The difference between a risk-free rate of 2.5% and 1.5% in our model is $13 to fair value," he wrote.

A turning point for Wall Street support of Beyond Meat

The upgrade is a turning point for the shares, which analysts turned mostly bearish on after the stock ran up nearly 600% in its first several weeks as a public company. It would eventually approach an 800% post-initial public offering return. Many analysts that cover the stock said that while their outlooks for Beyond Meat remained positive, the valuation of the company was too high.

That all started to take a turn around second-quarter earnings for Beyond Meat, its second earnings release as a public company. Shares fell ahead of earnings, as analysts wondered if they were overstretched. When the company announced earnings July 29, shares fell another 17% after the report showed that Beyond Meat lost more money than analysts had expected.

When it released its second quarter earnings, the company also announced that it would issue a second public offering of more than 3 million shares, some of which allowed early investors such as CEO Ethan Brown to cash in on the stock's 800% spike. Shares have been on a downward slope ever since.

But for JPMorgan analysts, the roughly 40% slide has made the shares appealing once again.

"We appreciate that the secondary offering spooked many investors; however, founder/CEO Ethan Brown trimmed only a tiny portion of his holdings, and we cannot blame anyone involved pre-IPO for locking in some gains," Goldman wrote.

There are a lot of positive things ahead for Beyond, which analysts have long said is a solid performer. The analysts say that cash on hand is likely to exceed $300 million by the end of the third quarter, and that they expect the company to raise its guidance again.

Shares of Beyond Meat are up more than 516% year to date.

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