The Long and the Short of It
I’ve got some good news and some bad news for investors. The good news first: sanity is returning to valuations. Now the bad news: sanity is returning to valuations.
It’s an old joke, but just like the best words are the old, shorts words, so too are the best jokes. There’s a good reason why savvy investors want sane valuations: it puts a premium on skill when selecting individual securities. The flip side is that if you don’t know what you’re doing, then you can really get whacked, and unfortunately this is what’s happened to many people who jumped into the “flavour-of-the-day” stocks like Peloton (which I wrote about last month). This month short idea is Beyond Meat Inc (NASDAQ: BYND, February 28th close $17.84).
BYND is a darling of the chattering classes. It’s the foremost manufacturer of plant-based meat substitutes. The company’s mission statement in its own words is “By shifting from animal to plant-based meat, we can positively affect the planet, the environment, the climate, and even ourselves.” Okay, great.
According to BYND, we can change the fate of human civilization by buying plant-based meat. Even if this were true, it doesn’t mean that we have to buy BYND’s product. Because it seems that fewer and fewer people are doing that right now anyways!
The company just reported its 2022 year-end results and they were terrible. Revenues were down 10% year-over-year and the company’s guidance is that sales will decline even more in 2023. The gross profit margin has collapsed – cost of goods sold exceeded revenue is 2022 which is borderline miraculous, and BYND just burned through $433 million in cash over the previous twelve months… and is poised to burn though more over the next 10 months. This puppy should be headed to zero, but it won’t get there. At some point, BYND becomes a buy-out target and a nice round number is $10 per share which is my price target over the next two years.
Contrast BYND with 3M Co (NYSE:MMM, February 28th close $107.73), a cash cow that’s been around (almost) forever, and continually returns value to shareholders with generous dividends and share buy-backs. The revenue picture for MMM has not been particularly bright over the past few years. Sales are increasing at a modest rate, but the company just raised its dividend which now stands at $1.50 per quarter and is a 5.57% annual yield. This comfortably exceeds the yield on the 10-year Treasury which is less than 4.0%. I’m ready to be quite a bit of money that ten years from now, MMM’s dividend will comfortably exceed $6.00 annually.
The way I would value MMM over time is quite straightforward: whenever its yield is less than 4.0%, it’s time to sell, which provides a very clean and easy price target: $6.00/0.04 = $150 per share, and that’s when I would be selling MMM.
There’s an important asterisk here, $150 is not my 2023 price target. I think it’s highly unlikely that MMM will see $150 over the next twelve months, but I think it could be achieved some time over the next two years… That being said, it would not be a bad strategy to buy MMM today, close your eyes, and see what the dividend looks like a decade from now.
Bottom line(s):
- 2-year price target for MMM: $150.00 (currently $107.73)
- 2-year price target for BYND: $10.00 (currently $17.84)
All articles published by PAIP Canada Inc. are for informative purposes only and does not constitute advice. We recommending consulting by a subject matter expert before making any financial decision(s).