On Monday, Barry Callebaut AG (BARN:SW) (OTC: BYCBF), a leading chocolate manufacturer, received an upgrade in its stock rating from Citi. The firm shifted its stance on the company from Neutral to Buy and increased the price target to CHF 1,700, up from the previous CHF 1,400.
This change comes despite the company's share price experiencing a decline of approximately 10% since July 11, following its 9-month sales update, which also reflected a prior 15% fall since the beginning of the current cocoa inflation cycle.
Citi's analysis suggests that Barry Callebaut may have an earnings upside of around 3% and presents a potential valuation anomaly. The firm's multi-variable scenario analysis indicates an asymmetric risk/reward situation for the company. The stock sentiment is currently heavily influenced by the prospects for the 2024/25 cocoa crop.
Citi notes that supportive weather conditions and the possibility of a La Niña event could act as positive catalysts for the crop yield over the next six months, which in turn may affect the company's stock positively.
The upgrade comes at a time when the market is cautious about the unclear volume outlook and profit guidance for Barry Callebaut. However, Citi anticipates that the consensus forecast for the company's 2024/25 volume is nearing its lowest point, suggesting limited downside from current levels. Despite the optimistic upgrade, Citi has reduced its earnings per share (EPS) forecasts for the fiscal years 2024-25 by about 10%, mainly due to higher finance charges.
The new price target of CHF 1,700 is based on a sum-of-parts (SOP) valuation method, using the calendar year 2025 estimated price-to-earnings (P/E) ratio. This valuation reflects Citi's confidence in the company's future performance despite the recent downturn in its share price and broader market concerns. Barry Callebaut's shares are traded on the Swiss Stock Exchange and over-the-counter in the United States.
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