Cocoa Volatility Will Squeeze Margins And Threaten Supply Chains

Key Takeaways

• Surging cocoa costs and climate-related supply risks are compressing margins, increasing supply chain pressure, and threatening profitability across future economic cycles.
  
• Structural shifts in consumer preferences toward healthier and alternative products, alongside rising substitutes, endanger legacy offerings and long-term revenue sustainability.
  
• Expansion into emerging markets, premium offerings, operational efficiencies, and outsourcing partnerships position Barry Callebaut for sustained growth, stable margins, and reduced revenue volatility.

Catalysts

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

• The sustained surge and volatility in cocoa bean prices, exacerbated by climate change and dependence on West African suppliers, is driving extreme input cost inflation and supply chain risk. With initial margins swelling to nine times prior levels and market backwardation elevating rolling costs by over sixty percent, Barry Callebaut faces a structurally higher cost base that will continue to compress net margins and threaten profitability in future cycles.
  
• Growing global health consciousness and mounting regulatory actions against sugar
• and fat-rich processed foods threaten the demand profile for traditional chocolate products. This secular shift is likely to constrain sales volumes and force costly portfolio adjustments, weighing on long-term revenue growth.
  
• Accelerating consumer shifts toward alternative, plant-based, and clean label confectionery products could undermine Barry Callebaut's core offerings, diminishing the relevance of its legacy dairy and premium chocolates and making large portions of the product portfolio vulnerable to material volume declines and margin erosion.
  
• High operating leverage and aggressive capital expenditure programs for expansion are increasing balance sheet risk at a time of declining free cash flow and mounting net debt-now over CHF 6 billion, with leverage ratios at uncomfortable levels. Should market demand or pricing power weaken further, Barry Callebaut may be forced to cut investment or dilute shareholders, severely impacting future earnings and returns on invested capital.
  
• The rise of cocoa-free and lab-grown chocolate substitutes presents an existential threat to traditional chocolate industry volumes. If these alternatives gain traction, Barry Callebaut could face outright revenue shrinkage and loss of pricing power, undermining both top-line and margin prospects for the entire traditional chocolate value chain.

Barry Callebaut Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Barry Callebaut compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Barry Callebaut's revenue will decrease by 4.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.1% today to 4.0% in 3 years time.
• The bearish analysts expect earnings to reach CHF 461.7 million (and earnings per share of CHF 83.67) by about July 2028, up from CHF 143.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 39.9x today. This future PE is lower than the current PE for the GB Food industry at 18.3x.
• 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 4.56%, as per the Simply Wall St company report.

Barry Callebaut Future Earnings Per Share Growth

Risks

• Consumer demand for chocolate remains resilient, with 84% of consumers maintaining or increasing chocolate consumption year-on-year, suggesting strong potential for top-line revenue growth even through periods of volatility.
  
• Accelerated expansion into emerging markets like Asia, Latin America, and Africa is driving high single-digit and double-digit growth in these regions, positioning Barry Callebaut to benefit from rising per capita consumption and increased disposable incomes, which could bolster global revenues.
  
• Strategic focus on premiumization, specialty chocolate, non-cocoa alternatives, and innovation (such as precision-fermented sunflower seed chocolate), enables Barry Callebaut to command premium pricing and access new markets, supporting higher net margins and mitigating risks from traditional cocoa price pressures.
  
• The ongoing rollout of the Next Level cost-saving, digitalization, and operational excellence initiatives-including significant SKU rationalization, factory optimization, and supply chain improvements-is expected to drive sustainable cost efficiencies, margin expansion, and higher recurring earnings in the medium-to-long term.
  
• Outsourcing partnerships with global food manufacturers and retailers are reinforced during periods of volatility, as customers seek stability and supply chain reliability, increasing Barry Callebaut's potential for stable, recurring revenue streams and reducing revenue variability.

Valuation

• The assumed bearish price target for Barry Callebaut is CHF790.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Barry Callebaut's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 CHF790.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CHF11.5 billion, earnings will come to CHF461.7 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 4.6%.
• Given the current share price of CHF1047.0, the bearish analyst price target of CHF790.0 is 32.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.