Stifel downgrades Lufthansa shares to 'Sell' – Price target drastically lowered

Investing.com - Stifel has downgraded the stock of Deutsche Lufthansa AG (ETR:LHAG) from "Hold" to "Sell" and lowered the target price from €7.00 to €4.50. This move follows a significant downward revision of the annual forecast by the German airline on Friday.

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In their note issued on July 15, Stifel analysts listed numerous difficulties for Lufthansa. With the statement "Buy on bad news won't cut it," the experts made it clear that the airline's problems go beyond temporary setbacks and are structural in nature.

Lufthansa has lowered its forecast for earnings before interest and taxes (EBIT) for the full year 2024 by 27% on Friday. Despite an EBIT of €685 million in the second quarter, which met expectations, the annual forecast was reduced from €2.2B to a range of €1.4B to 1.8B. "The (expected) profit warning is 20% below consensus expectations and 13% below our previous estimates, although second-quarter EBIT surprisingly met expectations," explain the experts, referring to a "pronounced weakness" in the second half of the year.

In response to Lufthansa's new forecast, Stifel has significantly lowered profit forecasts for the coming years. The EPS estimate for 2024 was reduced by 24% to €0.72, and for 2025 by 29% to €0.99. Similarly, EBIT estimates for 2024 were lowered by 20% and for 2025 by 25%, to €1.47B and €1.96B, respectively.

Stifel's forecasted EBIT margins also show a downward trend in the coming years: from 7.6% in 2023 to 3.9% in 2024 and 4.8% in 2025. The free cash flow yield, a key indicator of a company's financial health, is expected to drop sharply from 23.7% in 2023 to 7.6% in 2024.

"We believe that Lufthansa's problems are complex," say the experts. "There is excessive and inefficient capacity growth despite weak yields, combined with perceived product deficiencies and inadequate cost structures." Stifel predicts that continuous capacity expansion plans aimed at reaching 2019 levels will increase pressure on yields. A 3% year-over-year decline in yields is expected for 2024.

The new target price of €4.50 implies a downside potential of 21% compared to the current stock price of €5.70.

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