On Tuesday, Air France-KLM (LON:0LN7) (AF:FP) (OTC: AFLYY (OTC:AFLYY)) stock faced a downgrade from Morgan Stanley (NYSE:MS), moving from an Equalweight to an Underweight rating. The firm also lowered the price target for the airline's shares to EUR7.10, a decrease from the previous target of EUR9.40. The adjustment reflects concerns about the company's financial position and market competition.
The downgrade comes amidst the analyst's view that Air France-KLM's stock is expensive compared to its peers when evaluated on an enterprise value to earnings before interest and taxes (EV/EBIT) basis. The airline trades at 8.5 times for the year 2025, which is higher than the 4.7 times for International Airlines Group (LON:ICAG) (IAG) and 7.0 times for Lufthansa.
The Morgan Stanley analyst expressed preference for market exposure to Air France-KLM's competitors, citing factors such as lower corporate exposure and a more western market focus as seen with IAG. Despite acknowledging fuel-driven upgrades in the sector, the analyst indicated a more cautious stance towards Air France-KLM due to these comparative disadvantages.
The report also forecasts that Air France-KLM's net debt is expected to continue rising into 2025. This projection is partially attributed to ongoing social tax paybacks. Moreover, the firm's price target adjustment is based on the rolling forward of net debt, factoring in a negative 37% free cash flow (FCF) yield anticipated for 2025.
Morgan Stanley's revised stance on Air France-KLM underscores the competitive challenges and financial metrics that influence the valuation and outlook of airline stocks within the industry.
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