Which food stocks belong in your portfolio?

On Friday's segment of Good Buy or Goodbye?, Mizuho Securities Managing Director and Senior Consumer Equity Research Analyst John Baumgartner joins Market Domination to discuss which food stocks belong in investors' portfolios.

Salty snacks win the day: Baumgartner identifies Utz Brands (UTZ) as his "good buy," citing consumer preference for salty snacks, growth in market share, and profit increases related to restructuring. He adds that Utz is investing in artificial intelligence analytics as part of its margin expansion plans.

Beyond Meat (BYND), however, is Baumgartner's stock to avoid. The analyst points to demand weakness, competition from Impossible Foods, and potential equity dilution.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This article was written by Gabriel Roy

Video Transcript

It's a big noise.

The universe of stocks out there.

Welcome to, goodbye or goodbye.

Our goal to help cut through that noise to navigate the best moves for your portfolio today.

It's all about your memorial day barbecue burgers and potato chips may taste great on your plate, but they're not created equal when it comes to stock gain.

So what's the best way to play it?

I'm here with John Bomb, got managing director and senior consumer equity research analyst at you.

How good to see you.

Thanks for being here.

So in this case, chips win the day.

Uh Utz is your uh pick here.

And uh if you look at the stock, it's, it's up on the year, but it's had sort of a, a little bit of a rocky time.

First of all, you say generally salty snacks are doing well right now.

That's correct.

I mean, you see a little softness in the category, volumes are flat to down less than 1% but compare it relative to chocolate candy, sweet baked goods with volumes down mid to high single digits.

And on top of that, those sweet category should see more price inflation this year from Coco, you'll see prices moving higher, most likely.

And that should even reinforce the position for salty snacks.

Do you have a favorite UTS product chips?

I as a Marylander, the crab chips, the UTS crab chips are the way to go gaining market share as well.

So s you know, obviously it's a big category.

There are a lot of players here.

How is it doing well against its competitors?

When you think about the UTS geographic exposure, almost two thirds of sales are from core markets, East coast, New England, mid Atlantic.

Uh There's an expansion tar to almost 40% of sales.

Uh you know, west of the Mississippi, central Southern us, expanding out through M and A acquisitions getting on shelf, getting more distribution.

Uh We're seeing distribution right now for us mid single digits, five or 6% helping drive sales as well.

Interesting and s then there's also some restructuring that's going on here.

So what does that look like?

And what is it doing for the country?

So has laid out a three year plan about 300 basis points of margin expansion that involves shuttering lower efficiency, factories investing in A I analytics, you know, better returns on trade promotion.

You got to stop me right there.

How does a chip company use A I uh a number of different ways?

Right from the the manufacturing uh assets themselves, listen to vibrations on the machines knowing in advance when they may break down so you can either uh accelerate maintenance or deferred if you don't need it.

Uh That's number one, number two, giving much better insights and trade promotion, getting better lifts on volume.

Knowing uh, in this geography, there's more of a pull for buy one, get one or buy two, get one.

So you're getting better lifts on promo.

Very cool because I hear everybody talking about A I all the time.

So it's good to know specifically how it's being used.

Yeah, I mean we even see food companies just using listening tools on the internet hearing what flavor combinations are popular using that to inform innovation going forward to.

Very interesting.

Ok, so the thing that could potentially go wrong for s here is more a bigger picture issue wouldn't be an specific issue.

That's right.

I mean, you know, this quarter, we heard a fair amount of concern for low income consumers.

I mean ut's portfolio skews more towards mainstream households to begin with, but it is a concern for the category and with lower volumes comes more price competition in salty snacks.

We haven't really seen price petition since the financial crisis in the past 15 years.

It's a pretty rational category.

We think that demand holds up again, even sweet snacks even weaker at the margin.

So we think you could see more consumption coming from sweet into salty this year and the share gains by us with new distribution also should reinforce sales for them.

Are we continuing to see pricing go higher when it comes to this category?

It's flying out now for the most part, I mean, you've typically seen low single digit pricing.

Historically, the product mix is another lever as well.

You know, changing pack size is more single serve packs.

Soft drinks have done a very good job of that over the years.

You salty snacks moving towards that, that that approach as well.

So pack size is a big benefit.

We don't have to actually raise the list price increase, smaller pack size, higher price per pound.

That gets the job done as well.

Got you.

All right.

So let's talk about the stock that you would avoid here.

And it's in the burger category, specifically the plant based meat category.

It's beyond meat.

The stock is already down a lot, but you're not nibbling here, so to speak.

And there's demand weakness that we, I mean, we've been seeing this for a while.

Yeah, I mean, the category of volume has been down for 40 straight months now through April and that that's more or less priced in.

But our concern at the margin is strategy and competition.

If you look at strategy in 2023 when the industry took prices up during inflation beyond, took prices down.

Now they're raising prices into a down market.

Uh We're seeing pricing on the shelf now, 10% year on year already in April, uh, price increases went through last month.

We're very concerned over larger elasticity.

Another leg down for volume for beyond meat.

I mean, back in 2020 their market share was north of 20%.

Now, it's down to about four, the 15.

We see more downside of us there and that's compounded by competition.

We're seeing impossible foods.

Uh You know, really, I think revitalizing their business relaunch in effect now launching new flavors, some spicy varieties that are out there, getting more distribution plant based chicken in the whole foods.

Now, uh you know, as of as of this month.

So we think, you know, that combination of higher price for beyond more elasticity, more competition impossible.

We see downsides to revenue this year.

All right.

And then let's talk about what they might need to do on the capital side that there might be some sort of capital raise that would dilute.

That's right.

You know, cash burn here is still very strong.

I mean, we model about $100 million of cash burn this year down from 120 million last year.

So it's an improvement year on year, but with 160 million on the balance sheet at the end of Q one that burns pretty quick.

So, you know, our sense that they will have to do some sort of a capital raise this year, um, you had a, you know, 6 $7 stock price, it could get really dilutive really quickly with 65 million shares outstanding.

So what could go right for Beyond Meat and I guess new stuff that's gonna get people to buy new stuff.

You see the launch of Beyond version 4.0 with avocado oil.

The company has received some accolades from the American Heart Association Diabetic Association uh with the avocado oil as an ingredient, reducing saturated fat, reducing sodium that's rolling out into the market for this spring and this summer that could drive a bit, you know, a recovery market share, you know, stronger sales from here for the duration of, of 2024 international.

They have been growing international with distribution especially in food service with mcdonald's over in Europe.

That could be positive as well.

Any position in either of these stocks.

Ok. Just had to ask.

All right.

So uh you say people should buy us, avoid beyond meat.

Very appropriate going into this holiday weekend.

Thanks a lot.

Good to see you.

Thanks so much for watching.

Goodbye or goodbye.

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