Next Level Program And Asian Expansion Will Strengthen Competitive Edge

Key Takeaways

• The Next Level program is expected to improve operational efficiencies and enhance margins through cost reductions.
  
• Strategic expansion efforts, including outsourcing and Asian market entry, aim to boost revenues and leverage growth opportunities.
  
• Unstable cocoa supplies, pricing, and legislation may hinder Barry Callebaut's revenue growth and profitability amid high costs and negotiation challenges.

Catalysts

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

• Barry Callebaut's Next Level transformation program is expected to drive cost efficiencies and operational improvements, resulting in lower future costs and enhanced net margins.
  
• The focus on expanding outsourcing deals in the fast-moving consumer goods (FMCG) sector is anticipated to increase production volumes and revenues, leveraging existing infrastructure for additional growth.
  
• The plan to double the Gourmet business and scale up the Specialties business aims to enhance product offerings and improve pricing power, which can contribute to higher revenue and improved net margins.
  
• Expansion into the Asian market, with a focus on achieving a fair market share, represents a strategic move to tap into a growing consumer base, which could significantly increase overall revenues.
  
• Investments in high-tech farming initiatives and improving smallholder farming productivity are aimed at stabilizing cocoa supply and potentially lowering raw material costs over time, thus benefiting future earnings.

Barry Callebaut Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Barry Callebaut's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 4.6% in 3 years time.
• Analysts expect earnings to reach CHF 575.1 million (and earnings per share of CHF 105.17) by about December 2027, up from CHF 189.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.7x on those 2027 earnings, down from 37.2x today. This future PE is lower than the current PE for the GB Food industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 3.7%, as per the Simply Wall St company report.

Barry Callebaut Future Earnings Per Share Growth

Risks

• The global cocoa supply disruption and pricing volatility create uncertainty in securing the raw materials needed for Barry Callebaut's production, which could harm revenue growth.
  
• High cocoa bean prices and unpredictable market conditions have significantly increased the company's inventory values and net debt, impacting its free cash flow and potentially squeezing net margins.
  
• The introduction of legislation in West Africa that prevents cocoa farmers from replanting trees could lead to decreased productivity, affecting cocoa availability for Barry Callebaut and potentially reducing earnings.
  
• The company faces ongoing negotiations with FMCG clients regarding how cocoa price increases will be passed on to consumers, which could result in temporary declines in demand and potentially impact short-term revenue.
  
• High levels of investment in transformation programs and improved digital capabilities incur significant cost, potentially delaying improvements in profitability and impacting net margins if anticipated efficiency gains are not realized promptly.

Valuation

• The analysts have a consensus price target of CHF 1726.5 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 CHF 2000.0, and the most bearish reporting a price target of just CHF 1500.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CHF 12.4 billion, earnings will come to CHF 575.1 million, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 3.7%.
• Given the current share price of CHF 1287.0, the analyst's price target of CHF 1726.5 is 25.5% 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.