Street Calls of the Week
Inbvesting.com -- UBS downgraded MTU Aero Engines AG (ETR:MTXGn) to “neutral” from “buy,” cutting its price target to €400 from €485, as analysts pointed to signs the company’s strong aftermarket cycle is nearing its end and flagged uncertainties tied to leadership changes and cash flow timing, in a note dated Thursday.
Shares of the German aircraft engine manufacturer were down 2% at 04:50 ET (08:50 GMT).
UBS analysts said the decision reflected a series of “low level concerns” that collectively reduced confidence in their earlier bullish thesis.
Chief among them is the expectation that the engine aftermarket “beat and raise” cycle is ending, with 2026 guidance likely to meet, rather than exceed, market expectations.
“Chief amongst these concerns is our belief that the engine aftermarket beat & raise cycle is coming to an end,” UBS said, while acknowledging there remains “a possibility of a further guidance upgrade in H2 for Commercial Spares growth.”
The brokerage also pointed to slower-than-expected progress on grounded geared turbofan engines, or GTFs.
“GTF AoG rates have not reduced as fast as we had hoped, although the tone from all management teams involved in the GTF program remains reassuring,” the analysts said.
It is not expected that normalization will occur until 2027, as 34% of the fleet remained parked according to the report.
Another factor weighing on sentiment is near-term cash flow visibility. UBS reiterated its view that MTU’s long-term free cash flow prospects are attractive but said investors should not expect meaningful improvement before 2027 or 2028.
“Without the ability to validate our thesis in the near term our confidence has reduced,” the analysts said.
UBS added that the changeover of both the CEO and CFO in the same year introduces added uncertainty. “Management turnover: The changeover of both CEO and CFO within the year creates uncertainty,” the note stated.
Earnings forecasts were also trimmed, with roughly 5% downgrades to 2029 earnings per share.
The brokerage now expects EPS of €25.60 in 2029, compared with earlier forecasts of €26.40. While UBS said the company remains well positioned in the fundamentally strong aftermarket sector, it emphasized that risks to its estimates are now skewed to the downside.
To support the downgrade, UBS shifted its valuation approach from peer multiples to a discounted cash flow model, citing near-term headwinds such as GTF costs and imbalance payments that distort comparability. At €400, the new target price still values MTU at a 10% premium to Safran.
Despite the reduced rating, UBS stressed it continues to view the sector as attractive. “We continue to view the engine aftermarket industry as highly attractive on a fundamental basis, and believe that MTU is well positioned within it, both on a short and long term view,” the analysts said.