Beyond Meat and Pepsi Join Forces For Plant-Based Plans

No-moat Beyond Meat BYND and wide-moat PepsiCo PEP have announced the formation of a joint venture called The Planet Partnership to develop snacks and beverages made from plant-based protein. This is Beyond's first expansion outside of plant-based meats, indicating that its total addressable market is likely larger than investors initially envisioned. The shares are responding accordingly, surging 20%, pushing the stock into 2-star territory. We maintain our $146 fair value estimate until we hear more details from the firms, including the timing and nature of product launches, so we can gauge the potential market opportunity. If the venture is limited to the types of products already in Pepsi's lineup, the Beyond Meat stock movement is likely an overreaction, as plant-based Frappuccino, Muscle Milk, and Matador jerky would likely not generate the $300 million in annual revenue needed to justify it. If the venture expands to other dairy and meat-based products outside of Pepsi's current portfolio, the market opportunity will be larger, but so will execution risks as the firms move further away from their traditional areas of expertise. Additionally, while Pepsi has had several successful partnerships, not all its deals have panned out well. For example, its distribution agreement with Bang, a disruptive energy drink company, recently went sour and is currently in arbitration. Still, the formality of the JV structure and the favorable secular backdrop could make this a more fruitful endeavor for both firms. We view the partnership with Pepsi as a judicious approach to leveraging Beyond's plant-based protein expertise and Pepsi's marketing and distribution muscle in order to meet consumers' growing appetite for sustainable products. The move supports our Exemplary rating of Beyond's capital allocation strategies, as the firm has a strong track record of prudently investing resources in high-return projects while maintaining a strong balance sheet.

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