On Friday, HSBC made a notable change to its stance on Deutsche Lufthansa AG (LHA:GR) (OTC: OTC:DLAKY), downgrading the airline's stock from Buy to Hold. The firm also adjusted its price target for Lufthansa's shares, reducing it from EUR8.00 to EUR7.00.
The downgrade comes as HSBC revises its 2024 adjusted EBIT estimate for Lufthansa downward by 14%. The analyst at HSBC cited a sum-of-the-parts valuation approach, which includes evaluating the Passenger and MRO (Maintenance, Repair, and Overhaul) businesses based on target EV/EBITDA multiples, and the cargo business based on the value of the owned cargo airplanes.
Despite the reduction in the target price, HSBC's new valuation still suggests a circa 10% upside potential for Lufthansa's stock. However, the firm's decision to downgrade reflects a more cautious outlook on the stock, primarily due to the limited visibility provided by the company at this point.
HSBC's analyst also noted a less optimistic view for the years ahead, with lower-than-consensus estimates for 2024 and 2025. This caution is further echoed in HSBC's sector note titled "Expect delays and turbulence," indicating a general wariness regarding the aviation sector as it approaches the year 2025.
The update from HSBC could influence investor sentiment as it suggests a shift in expectations for Lufthansa's financial performance and the broader aviation industry's prospects in the near term.
In other recent news, Deutsche Lufthansa (ETR:LHAG) AG has had its stock target increased by Citi, despite maintaining a sell rating. The revised price target, now at EUR5.50, up from EUR5.00, comes ahead of Lufthansa's third-quarter results for 2024. Citi anticipates Lufthansa to report an adjusted EBIT of EUR1.6 billion for the full year 2024, primarily due to reduced fuel expenses and improved pricing within the cargo segment.
In addition, escalating tensions in the Middle East have led to significant adjustments in international flight schedules. Major airlines, including Lufthansa Group, have suspended or canceled flights to regions including Lebanon, Israel, Iran, and Iraq. Lufthansa Group has suspended flights to Tel Aviv until October 31, Tehran until October 26, and Beirut until November 30.
These are some of the recent developments that have been influencing the operations and financial outlook of these airline companies. As the situation in the Middle East evolves, further updates from the airline industry are expected. It's important to note that these facts are derived from recent articles and analyst notes, providing a snapshot of the current state of affairs in the airline industry.
InvestingPro Insights
Recent data from InvestingPro provides additional context to HSBC's downgrade of Deutsche Lufthansa AG. The airline's current P/E ratio of 8.23 aligns with one of the InvestingPro Tips, which notes that Lufthansa is "trading at a low earnings multiple." This valuation metric could be seen as attractive to some investors, despite HSBC's more cautious stance.
InvestingPro data also reveals that Lufthansa's revenue for the last twelve months as of Q3 2024 stood at $41.12 billion, with a revenue growth of 5.28% over the same period. This growth, while positive, may not be sufficient to allay concerns about the company's future performance, as reflected in HSBC's downgraded outlook.
Another InvestingPro Tip highlights that Lufthansa is a "prominent player in the Passenger Airlines industry," which underscores its significance in the sector despite the current challenges. However, the tip indicating that "net income is expected to drop this year" aligns with HSBC's reduced EBIT estimates and more conservative outlook for the coming years.
For investors seeking a more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further insights into Lufthansa's financial health and market position.
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