Barclays upgraded the stocks of Swiss chocolatiers Lindt & Spruengli (LISN) and Barry Callebaut (SIX) to ‘Overweight’ on Tuesday, signaling confidence in both companies’ ability to capitalize on favorable cocoa price trends, growth in outsourcing, and improved cost efficiencies.
This marks the first time both major European chocolate makers have received simultaneous Overweight recommendations from the firm, underscoring their growth potential amid a recovering cocoa market.
Easing of cocoa prices to help cos
Lindt & Spruengli’s stock rating was raised from ‘Equalweight’ to ‘Overweight’, with Barclays increasing its price target from CHF 110,000 to CHF 120,000.
The key driver behind the upgrade is the anticipated decline in cocoa prices, which have been inflated due to poor harvests.
Improved harvests in West Africa, the primary cocoa-producing region, are expected to reduce input costs for Lindt, enhancing profitability.
“Lindt is well-positioned to implement pricing strategies necessary to achieve and even exceed its projected margin growth,” Barclays analysts Lina Thomas and Daan Struyven stated.
Separately, Barry Callebaut also received an Overweight rating upgrade, with Barclays revising its price target from CHF 1,450 to CHF 1,800.
The upgrade reflected confidence in the company’s ability to benefit from normalized cocoa prices and capitalize on significant outsourcing opportunities.
Over the past year, Barry Callebaut has faced margin pressure due to high cocoa costs, but with production expected to recover in the 2024/25 harvest year, Barclays sees an improved outlook.
“Early signs here are encouraging, as world cocoa production is likely to recover in the 2024/25 year starting in October,” noted the analysts.
Barry Callebaut has projected customer pricing increases in the mid-single to mid-teen percentages for 2025, which should mitigate the impact of previous price hikes on volumes.
Strong organic growth adds to Lindt upgrade
Lindt has consistently reported strong organic growth, outpacing its own top-line guidance.
Over the past three years, the company has posted 35% aggregate organic growth, including increases of 13% in 2021, 11% in 2022, and 10% in 2023.
Barclays also highlighted Lindt’s resilience in navigating inflationary pressures and higher cocoa raw material costs.
The firm believes that Lindt’s ability to manage these challenges while maintaining growth positions it as a standout stock in the European staples sector.
“Lindt’s potential to double its market share in the long term makes it a compelling growth stock,” added the analysts.
Barry Callebaut’s outsourcing expansion fuels optimism
Along with gains brought by low cocoa prices, Barry Callebaut’s growing outsourcing business is seen as a major growth driver.
Recently, Barry Callebaut secured a significant outsourcing contract in North America, which could account for more than 2% of its total volume.
This win signals renewed momentum in outsourcing, an area that had slowed in recent years.
Barclays said,
Outsourcing momentum is picking up again, supported by rising demand for complex products like sugar-free and dairy-free chocolates.
With 60% of the global chocolate market still untapped, Barry Callebaut is well-positioned to capture more share through outsourcing deals.
Cost-saving initiatives strengthen Barry Callebaut’s financials
Another key factor boosting Barry Callebaut’s outlook is its progress on a cost-saving program aimed at achieving CHF 250 million in savings by FY27.
Barclays raised its cost-saving assumptions by CHF 25 million for FY25-FY27, driving an upward revision in EPS forecasts by 6% for FY26-27.
Barry Callebaut has already made significant strides in its cost-saving efforts, closing three plants in Germany, Malaysia, and Italy, and meeting most of its SKU rationalization targets.
The company’s improved combined ratio for cocoa grinding, a critical profitability metric, from 3.6x to 4.6x in FY24, further enhances its financial position.
Barclays expects Barry Callebaut’s Global Cocoa business to contribute CHF 50 million to EBIT by FY25.
Risks to consider for Barry Callebaut
Despite the positive outlook, Barclays identified some risks to Barry Callebaut’s prospects.
Continued high cocoa prices could place further pressure on the company’s end markets, potentially leading to a more conservative forecast for FY25.
Additionally, food safety concerns, such as a recent salmonella incident in Mexico, though contained quickly, pose reputational risks.
Barry Callebaut’s stretched balance sheet, resulting from restructuring costs and high working capital demands, also limits its margin for error.
Nonetheless, Barclays remains bullish on Barry Callebaut’s potential to deliver strong results over the coming years, driven by outsourcing growth, cost efficiencies, and improved market conditions.
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