Investing.com – Stifel downgraded Deutsche Lufthansa AG (ETR:) from a “Hold” rating to a “Sell” rating and cut their target price from €7.00 to €4.50. The move follows a major downward revision to its annual forecast by the German airline on Friday.

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In their note issued on July 15, Stifel analysts listed several difficulties for Lufthansa. Stating “Bad news market won’t cut it,” experts made it clear that the airline’s problems go beyond temporary setbacks and are structural in nature.

Lufthansa cut its full-year 2024 earnings before interest and tax (EBIT) forecast by 27% on Friday. Despite EBIT of 685 million euros in the second quarter, which met expectations, the annual forecast was lowered from 2.2 billion euros to a range of 1.4 billion euros to 1.8 billion euros. “The (expected) profit warning is 20% below consensus expectations and 13% below our previous estimates, although second-quarter EBIT surprisingly met expectations,” the experts explained, referring to a “significant weakness” the second half of the year.

In response to Lufthansa’s new forecast, Stifel significantly lowered its earnings 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. Likewise, EBIT estimates for 2024 were cut by 20% and for 2025 by 25%, to €1.47 billion and €1.96 billion, respectively.

Stifel’s projected 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. Free cash flow performance, a key indicator of a company’s financial health , is expected to decline sharply from 23.7% in 2023 to 7.6% in 2024.

“We believe Lufthansa’s problems are complex,” experts say. “There is excessive and inefficient capacity building despite weak returns, coupled with perceived product shortages and inadequate cost structures.” Stifel predicts that continued capacity expansion plans aimed at reaching 2019 levels will increase pressure on yields. Yields are expected to decline by 3% year-on-year for 2024.

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

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