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Maple Leaf had been generating impressive returns for its shareholders before expanding into meat alternatives in 2017.

Christopher Katsarov/The Globe and Mail

Maple Leaf Foods Inc. is making a big bet on meat alternatives in a bid to tap into rising consumer interest in plant-based burgers. The problem: It’s an expensive wager that’s weighing on the share price.

The stock is down 36 per cent over the past two years, including a 13.7 per cent one-day slide after the company reported disappointing third-quarter financial results at the end of October. Given that meat sales increased at a decent clip of 5 per cent during the quarter, the company’s diversification from bacon, cold cuts and oven-roasted turkey is a big reason for the downturn.

So over the longer term, will this strategy pay off?

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Maple Leaf had been generating impressive returns for its shareholders before expanding into meat alternatives in 2017 through the U.S.-based acquisitions of Lightlife Foods and Field Roast Grain Meat Co.

Between the end of 2015 and the end of 2017, the share price increased 51 per cent, double the gain of the S&P/TSX Composite Index over the same two-year period (not including dividends). It touched a record high of $36.94 in Toronto in December, 2017.

Annual profit surged between 2015 and 2017, from $42-million to $164-million. Over the same period, profit margins expanded to 10.8 per cent from 6.7 per cent as Maple Leaf cut costs.

But sales grew more slowly, increasing less than 7 per cent over the entirety of this two-year period and underscoring the need to diversify into higher-growth markets. Plant-based proteins fit the bill with tantalizing growth prospects. According to Nielsen, 21.6 per cent of U.S. households are now purchasing meat alternatives, up from just 1.6 per cent a year ago.

The early success of Beyond Meat Inc. underscores investor interest. After an initial public offering in May, the shares surged 840 per cent by July amid hopes for soaring sales worldwide – including Canada, its second largest market outside the United States. In the third quarter, the California-based company reported that revenue increased 250 per cent year-over-year to US$92-million.

But this is by no means a wide-open market with guaranteed success. Beyond Meat’s share price has succumbed to gravity in recent months, falling 68 per cent from its high after a secondary offering, interest among short-sellers and rising competition.

To name just two recent additions, Tyson Foods Inc. launched its plant-protein division, called Raised & Rooted, in June. Smithfield Foods Inc. launched its meat alternative, Pure Farmland, in August.

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Maple Leaf may be a couple of years ahead of these meat-producing rivals, but the advantages are difficult to see in recent financial numbers, where expenses related to the rollout of meat alternatives are troubling.

Selling, general and administrative expenses (SG&A) for the plant protein group – largely related to advertising and promotional activities – rose to $44.9-million in the third quarter, up from $8.6-million a year ago. Put another way, expenses were 95.5 per cent of sales, up from 23.9 per cent last year.

“The big cause for concern based on the conversations we have had with many investors was the SG&A spending rate during the quarter, and the likelihood that this will continue for the foreseeable future," Derek Dley, an analyst at Canaccord Genuity, said in note.

Mr. Dley’s take? He believes that Maple Leaf’s declining share price reflects dimming optimism over the plant protein group. Mr. Dley estimates that it is trading at book value, which ignores the group’s potential. He noted that Maple Leaf is expecting revenues from meat alternatives to rise by 30 per cent to 35 per cent annually for the next decade, to $3-billion by 2029.

“The prize at the end of the day could be substantial,” Mr. Dley said in his note.

There are a lot of moving parts here, though. Meat is meat – but meat alternatives will need continuous research and development to keep up with rivals, all but ensuring ongoing costs. And it’s hard to believe that the competitive environment, already heating up, will subside anytime soon.

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Consumers are loving it. Investors are going to need some convincing.

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