Barry Callebaut Stock Soars as Barclays Upgrades to Overweight: Cocoa Prices and Outsourcing Drive Optimism
Investing.com -- In a significant move, shares of Swiss chocolate giant Barry Callebaut (SIX:) surged on Tuesday, following an upgrade by Barclays from "equal weight" to "overweight." The upgrade is backed by several promising factors, including the normalization of cocoa prices, lucrative outsourcing opportunities, and substantial strides in cost-saving initiatives.
Stock Performance and Target Price Adjustment
As of 3:35 am (0735 GMT), Barry Callebaut's shares skyrocketed by 6.5%, trading at CHF 1,550. Notably, Barclays has also revised its price target for the stock, increasing it from CHF 1,450 to CHF 1,800. This adjustment reflects a growing confidence in the company's capacity to navigate recent challenges and enhance profitability.
Cocoa Price Normalization: A Boon for Margins
Over the past year, Barry Callebaut has faced margin pressures due to soaring cocoa prices, which led to a cautious sentiment around the stock. However, early signs indicate a recovery in global cocoa production, as noted by Michel Arrion, Executive Director of the International Cocoa Organization (ICCO). This optimistic outlook is reinforced by confirmations from both Barry Callebaut (BARN) and Mondelez (NASDAQ:) at the recent Global Consumer Staples conference.
Strategic Pricing and Limited Price Elasticity
Barry Callebaut has projected customer pricing increases ranging from mid-single to mid-teen percentages for 2025, depending on cocoa content in various products. While some customers have delayed pricing decisions awaiting more clarity on cocoa costs, the potential for lower cocoa prices could alleviate the need for further hikes, reducing pressure on volumes. Impressively, despite significant price increases over the past two years, Barry Callebaut has seen limited impact on volume, underscoring the low price elasticity in the confectionery sector.
Outsourcing: A Key Growth Driver
Barclays identifies Barry Callebaut's expanding outsourcing business as a significant growth catalyst. The company recently secured a major outsourcing contract in North America, potentially accounting for over 2% of its total volume. This contract win signals a resurgence in Barry Callebaut’s outsourcing momentum, which had slowed in recent years. Additionally, the upcoming European Union Deforestation Regulation (EU DR) set to take effect at the end of 2024 could further boost outsourcing demand as chocolate manufacturers seek to navigate compliance complexities and costs. Barry Callebaut's investments in regulatory management systems position it advantageously, especially compared to less-prepared competitors.
Cost-Saving Initiatives and Financial Outlook
Barry Callebaut is making steady progress on its cost-saving program, targeting CHF 250 million in savings by FY27. Over the past year, the company has closed three plants in Germany, Malaysia, and Italy, achieving most of its SKU rationalization targets. Barclays has raised its cost-saving assumptions by CHF 25 million for FY25-FY27, leading to a 6% uplift in EPS forecasts for FY26-27. Financially, Barry Callebaut is poised for further improvements, particularly in its cocoa processing operations, with its combined ratio—a key profitability metric for cocoa grinding—improving from 3.6x to 4.6x over the first nine months of FY24.
Potential Risks
Despite the positive outlook, Barclays highlighted a few potential risks. Elevated cocoa prices could pressure Barry Callebaut’s end markets, leading to a more conservative FY25 outlook. Additionally, food safety concerns remain a risk, as evidenced by a recent salmonella discovery in Mexico, though it was swiftly contained. Lastly, the company's stretched balance sheet, impacted by restructuring costs and high working capital demands, limits its margin for error.
Conclusion: A Bright Future Ahead
Despite potential risks, Barclays sees Barry Callebaut as well-positioned to deliver stronger results in the coming years, driven by improved cocoa market conditions, outsourcing momentum, and cost efficiencies.
Analysis for Beginners: Why This Matters
In simple terms, Barry Callebaut is a big chocolate company that has been struggling due to high cocoa prices. But now, things are looking up because cocoa prices are expected to stabilize, and the company is finding new ways to save money and grow its business. They are also getting more customers for their outsourcing services, meaning other companies are hiring Barry Callebaut to make chocolate for them. This is all good news for investors, as it means the company is likely to make more money in the future, which usually makes the stock price go up. However, there are still some risks, like high cocoa prices and food safety issues, that investors should keep an eye on.