Citi downgrades Alstom to "neutral," citing valuation concerns and growth limits

Investing.com -- Alstom (EPA:ALSO) has been downgraded to a "neutral" rating from a "buy" by analysts at Citi Research, reflecting concerns over the company’s valuation and the real impact of Germany’s planned infrastructure investments on its business, in a note dated Monday. 

Shares of the French multinational rolling stock manufacturer were down 3.6% at 05:51 ET (09:51 GMT).

The downgrade follows a recent rise in Alstom’s share price, which has now approached Citi’s target price of €26.

The analysts flag that Germany’s proposed infrastructure investment includes a substantial allocation to rail projects, with up to €60 billion earmarked over the next decade. 

However, they caution that the actual spending increase remains uncertain due to government accounting constraints and pre-existing investment plans. 

The potential funding boost to rail infrastructure is seen as positive, but Citi estimates that even with a 7% compound annual growth rate in German rail investment, it would contribute less than 1% to Alstom’s overall sales growth. Currently, the German market accounts for only 8-9% of Alstom’s total sales.

Citi also revisited Alstom’s valuation, maintaining a target price of €26. The firm’s analysis suggests that despite some optimism in the market, investors remain concerned about Alstom’s ability to generate sustained cash flow. 

The company has faced cash flow volatility in the past, particularly following its acquisition of Bombardier (OTC:BDRBF) Transportation. 

The analysts suggest that until the market gains confidence in Alstom’s long-term cash conversion, investors are likely to remain cautious.

Citi’s earnings projections for Alstom align with market expectations. For the 2026 fiscal year, they anticipate sales of €19.34 billion, an adjusted EBIT of €1.44 billion, and free cash flow of €589 million. 

While these figures slightly exceed consensus estimates, the firm does not identify any major catalysts to support a more optimistic outlook on the stock.

Alstom’s downgrade reflects broader concerns about the limitations of potential growth drivers, as well as continued investor wariness over the company’s financial stability. 

While the company remains well-positioned in the rail sector, the near-term outlook suggests limited upside for its stock at current levels.