Investing.com -- Morgan Stanley downgraded Safran SA (OTC:SAFRY) from Overweight to Equal-weight on Thursday, citing limited upside potential in the near term despite the company's strong fundamentals.
The investment bank maintained its price target for the stock €243.
Safran (EPA:SAF), considered the highest quality name in Morgan Stanley (NYSE:MS)'s coverage, has seen significant growth driven by a robust aftermarket thesis that the market now comprehends more fully.
"We forecast a strong growth outlook (2024-28 MSe EPS CAGR 15%), underpinned by industry dynamics which drive 'higher for longer' civil aftermarket growth," the bank noted.
However, the firm sees fewer catalysts ahead, following recent company announcements regarding 2025 guidance and a multi-year buyback program.
Morgan Stanley highlighted that the market has already factored in Safran's conservative medium-term targets, with consensus estimates for 2028 EBIT at €6.9 billion, well above the company's guidance of €6.0-6.5 billion.
Free cash flow expectations are similarly elevated, with consensus at €19.6 billion for 2024-2028, compared to management's €15-17 billion guidance.
The stock rose 33% in 2024 and 90% since early 2023, driven by earnings upgrades and multiple expansions. However, Morgan Stanley believes the current valuation, trading at an FY3 P/E of 22x, reflects a fair value in line with its two-year average and at a discount to peer GE.
Despite the strong fundamentals, Morgan Stanley sees limited room for further expansion, particularly as air traffic demand normalizes faster than expected.