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On Wednesday, Morgan Stanley (NYSE:MS) downgraded shares of AP Moller Maersk (MAERSKB:DC) (OTC: AMKBY (OTC:AMKBY)) from Equalweight to Underweight, adjusting the price target to DKK12,200 from DKK14,500.
The firm cited an anticipated decline in freight rates due to container supply growth expected to significantly exceed demand growth, impacting the company's financial forecasts for fiscal year 2025. Currently trading at $8.85, InvestingPro analysis suggests the stock is undervalued, with a Financial Health Score rated as "GREAT."
The downgrade reflects Morgan Stanley's analysis of the shipping company's high operational gearing, indicating that minor changes in net income can lead to substantial variations in earnings and free cash flow (FCF) projections.
The revised price target represents an average of valuation methods including discounted cash flow (DCF), enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), and price to book (P/B) ratio.
With current revenue of $52.63 billion and an EV/EBITDA of 3.72x, the company's metrics align with Morgan Stanley's conservative valuation approach. InvestingPro subscribers can access 13 additional key insights about Maersk's financial health and valuation metrics.
Morgan Stanley's valuation employs a P/B ratio of 0.6x, compared to the long-term average of 1x, and an EV/EBITDA multiple of 3x for FY25, with a standard deviation range of 3-7x. The firm suggests that a discount on the stock is warranted due to the risks associated with earnings and the negative FCF anticipated for FY25.
The outlook is further justified by the company's plans to expand its fleet amidst a backdrop of structural industry oversupply. The current P/B ratio stands at 0.49x, with the stock maintaining a market capitalization of $25.98 billion.
The investment bank's DCF model assumes a weighted average cost of capital (WACC) of approximately 8% and a normalized EBITDA margin for the group at 15%. These factors collectively influence the lowered earnings expectations and contribute to the rationale behind the downgrade and reduced price target for Maersk's shares.
For a comprehensive analysis of Maersk's valuation and future prospects, investors can access the detailed Pro Research Report available on InvestingPro.
In other recent news, A.P. Møller - Mærsk reported a robust financial outcome for the third quarter of 2024, with an EBITDA of $4.8 billion and an EBIT of $3.3 billion. Significant growth was seen in the Ocean segment with its EBIT reaching $2.8 billion, driven by a 54% hike in freight rates. The Logistics & Services segment and the Terminal business also demonstrated strong growth.
In light of these developments, Maersk upgraded its full-year EBIT guidance to between $5.2 billion and $5.7 billion and expects a minimum free cash flow of $3 billion. Management plans to focus on mergers and acquisitions, aiming for larger, meaningful acquisitions.
Despite positive projections, challenges persist in warehousing and distribution, and the transition to the Gemini Alliance may lead to higher initial costs. Analysts from the firm expressed confidence in market demand sustainability and a focus on improving margins in warehousing.
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