Future Farming Initiative And New Capacities Will Strengthen Supply Chains

Key Takeaways

• Strategic investments and supply chain expansions in North America and Asia aim to enhance revenue growth and stabilize future earnings.
  
• Secured bean supply and a focus on cost efficiencies are intended to stabilize input costs and improve net margins.
  
• Increased cocoa price volatility and operating costs are reducing margins, impacting cash flow and potentially affecting revenue and profitability.

Catalysts

Engages in the manufacture and sale of chocolate and cocoa products.

• Barry Callebaut is adapting its operating and financing model amidst unprecedented bean price volatility, aiming to deleverage and drive higher returns, which is expected to improve net margins as efficiencies are realized.
  
• The Next Level investment program is anticipated to generate CHF 250 million in synergies, with 75% expected to flow through to the P&L, gradually enhancing earnings over the next 12 months as cost savings take effect.
  
• The company has secured bean supply into early 2026, ensuring stable input costs and protecting customer deliveries which should stabilize revenue and safeguard future earnings.
  
• Expansion initiatives such as the Future Farming Initiative in Brazil and new capacities in North America are designed to strengthen supply chains and meet growing demand, particularly in Asia, supporting revenue growth.
  
• Barry Callebaut has raised significant liquidity through bond issuances, which improves its financial flexibility, enabling strategic investments that are likely to enhance long-term earnings and optimize the balance sheet.

Barry Callebaut Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Barry Callebaut's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.1% today to 4.0% in 3 years time.
• Analysts expect earnings to reach CHF 534.7 million (and earnings per share of CHF 97.63) by about April 2028, up from CHF 143.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CHF459.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, down from 28.2x today. This future PE is lower than the current PE for the GB Food industry at 20.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.91%, as per the Simply Wall St company report.

Barry Callebaut Future Earnings Per Share Growth

Risks

• Unprecedented bean price volatility has significantly impacted customer behavior and short-term financial performance, potentially affecting revenue and profitability.
  
• Operating costs are extremely high, with increased backwardation creating higher costs to roll short futures and surging carry costs, which could reduce net margins.
  
• Significant delays in customer orders and shifting dynamics in the cocoa market have led to historically low coverage and stock levels, impacting sales volume and potentially revenue.
  
• Higher-than-anticipated financing and market-related costs, linked to increased cocoa bean prices, have delayed pricing strategies, impacting net profit.
  
• Challenges with maintaining robust cash flow due to increased inventory values from the cocoa price doubling can affect liquidity and overall financial health.

Valuation

• The analysts have a consensus price target of CHF1381.357 for Barry Callebaut based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF2000.0, and the most bearish reporting a price target of just CHF900.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF13.5 billion, earnings will come to CHF534.7 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 4.9%.
  
• Given the current share price of CHF741.5, the analyst price target of CHF1381.36 is 46.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.