On Monday, Citi has downgraded MTU Aero Engines (OTC:MTUAY) AG stock, listed on XETRA as MTX:GR and over-the-counter as MTUAY, from 'Neutral' to 'Sell'. However, the firm raised the price target on the stock to €250 from the previous €228.
The decision came after a thorough analysis based on discounted cash flow (DCF) and the expectation of improved cash conversion beyond the forecast period.
Citi's assessment suggests that MTU Aero Engines is the first among commercial aerospace stocks to fully recover from the impacts of Covid-19. According to the firm, MTU is anticipated to experience more normalized profit growth of around 8% compound annual growth rate (CAGR) from 2024 to 2029.
This growth projection is in contrast to its peers who are still in the recovery phase and are expected to see higher growth rates, with engine peers at 12-14% and Airbus at approximately 20%.
The downgrade reflects Citi's view that MTU Aero Engines should command a lower enterprise value to earnings before interest and taxes (EV/EBIT) multiple compared to its peers. This is due to the lower expected cash conversion rates for MTU. The firm's DCF valuation indicates that the fair value of MTU's stock should be at 15.4 times its projected 2024 EV/EBIT.
Citi's analysis concludes that although MTU Aero Engines has emerged from the pandemic-induced downturn, the market has already accounted for its recovery. This perspective has resulted in a lower EV/EBIT multiple for MTU Aero Engines, as the firm's profit growth is set to normalize while its peers are still expected to benefit from higher growth rates during their recovery.
InvestingPro Insights
Recent data from InvestingPro provides insights that could offer additional context to Citi's analysis of MTU Aero Engines AG (MTUAY). Despite a challenging period, MTUAY has shown resilience with a notable return over the last year, reflected by a 67.66% year-to-date price total return. Analysts have recognized this performance, with 4 analysts revising their earnings upwards for the upcoming period, suggesting confidence in the company's ability to surpass expectations. Additionally, the company has a history of rewarding shareholders, maintaining dividend payments for 19 consecutive years and raising its dividend for the past 3 years.
While the company is trading near its 52-week high, currently at 99.34% of this peak, investors should note MTUAY's negative gross profit margins and operating income, which could be a concern. The company's P/E ratio stands at a negative -204.07, indicating that it may be overvalued or that investors are expecting high growth. However, the anticipated sales growth and the prediction of profitability this year align with Citi's forecast of a normalized profit growth for MTU Aero Engines AG.
For those looking to delve deeper into MTUAY's performance and potential, InvestingPro offers a comprehensive set of additional tips, including an analysis of the company's moderate level of debt and its low price volatility, which may appeal to risk-averse investors. To explore all the available insights, including more InvestingPro Tips for MTUAY, visit https://www.investing.com/pro/MTUAY.
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