New Aircraft Deliveries And ITA Integration Will Improve Performance

Key Takeaways

• Focus on operational excellence and strategic investments in new aircraft improve margins and enhance passenger experience, potentially driving medium-term earnings growth.
  
• Strategic synergies with ITA Airways and strong demand in key markets increase capacity and revenues, while favorable fuel costs improve earnings stability.
  
• Cost pressures and geopolitical instability threaten Deutsche Lufthansa's net margins and revenue growth amid weaker U.S. bookings and slower capacity expansion.

Catalysts

Operates as an aviation company in Germany and internationally.

• Lufthansa is focusing on operational excellence, achieving the highest levels of regularity and punctuality in a decade, which should improve net margins by reducing irregularity costs by 40% and enhancing customer satisfaction.
  
• The increased investment in new aircraft, including the delivery of 787s and refurbishment of cabins across various aircraft, aims to boost revenue potential and enhance passenger experience, potentially driving higher earnings in the medium term.
  
• The ongoing integration and strategic synergies with ITA Airways, with full year benefits expected by 2027, should contribute to increased capacity and revenues through leveraging ITA's strong position in the Italian market.
  
• A strong demand environment is anticipated, with growth in North Atlantic passenger numbers and capacity expected to positively impact revenue, despite potential geopolitical volatility.
  
• The expected benefits from lower fuel costs, driven by favorable pricing dynamics, and continued hedging strategies should improve net margins and overall earnings stability over the fiscal year.

Deutsche Lufthansa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deutsche Lufthansa's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.3% in 3 years time.
• Analysts expect earnings to reach €1.9 billion (and earnings per share of €1.56) by about May 2028, up from €1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.3 billion in earnings, and the most bearish expecting €1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.6x on those 2028 earnings, down from 6.1x today. This future PE is greater than the current PE for the GB Airlines industry at 5.4x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Deutsche Lufthansa Future Earnings Per Share Growth

Risks

• The shift of bookings towards the U.S. point of sale is somewhat offset by a weaker dollar, which could negatively impact revenue from those sales.
  
• Despite a positive start, there are early signs of softer bookings to U.S. destinations in Q3, especially in lower fare classes, which could risk revenue growth if this trend persists.
  
• Cost pressures from general inflation and increased expenses, such as fees, charges, and personnel, resulted in a 16% increase in material costs ex-fuel, potentially squeezing net margins.
  
• Increasing geopolitical instability, like tensions that might impact the industry unpredictably, could disrupt operations or demand, potentially affecting earnings.
  
• The ongoing smoke of weaker-than-expected capacity growth might lead to inefficiencies and higher costs, pressuring net margins, especially if the global economy slows further.

Valuation

• The analysts have a consensus price target of €6.944 for Deutsche Lufthansa based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €12.0, and the most bearish reporting a price target of just €4.85.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €43.3 billion, earnings will come to €1.9 billion, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of €6.32, the analyst price target of €6.94 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.