Acquisition Of ITA Airways Will Expand International Presence

Key Takeaways

• Strategic investments in ITA Airways and Lufthansa Technik expansion are poised to drive international growth and improve overall group earnings.
  
• Operational efficiency improvements and capacity shifts towards profitable markets should enhance net margins and reduce costs, boosting profitability.
  
• Labor disputes, infrastructure issues, and restrictions on Russian airspace have severely impacted Lufthansa's financial performance, necessitating urgent strategic adjustments.

Catalysts

Operates as an aviation company in Germany and internationally.

• The acquisition of a 41% stake in ITA Airways is a significant move towards further internationalization and represents a key strategic target, potentially driving future revenue growth.
  
• The improvement in operational stability, especially noticeable in Munich and Zurich, along with higher customer satisfaction, is expected to enhance net margins by reducing costs associated with operational disruptions.
  
• The shift in capacity allocation towards more efficient AOCs (Air Operator Certificates) like City Airlines and Discover Airlines is anticipated to optimize profits and increase earnings by focusing on profitable market areas.
  
• The ongoing turnaround program aimed at cost improvements and revenue enhancements is projected to generate a gross adjusted EBIT effect of approximately €1.5 billion by 2026, impacting overall earnings positively.
  
• Lufthansa Technik's continued strong performance and expansion of operations are expected to maintain or improve net margins and contribute positively to the overall earnings of the group.

Deutsche Lufthansa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deutsche Lufthansa's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 4.4% in 3 years time.
• Analysts expect earnings to reach €1.9 billion (and earnings per share of €1.54) by about April 2028, up from €1.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.4 billion in earnings, and the most bearish expecting €1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.5x on those 2028 earnings, up from 5.4x today. This future PE is greater than the current PE for the GB Airlines industry at 5.3x.
• 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 7.74%, as per the Simply Wall St company report.

Deutsche Lufthansa Future Earnings Per Share Growth

Risks

• Labor disputes and infrastructure issues in Germany have significantly impacted the financial performance of Lufthansa's core brand, Lufthansa Airline, leading to a substantial decline in adjusted EBIT (impacting earnings).
  
• Lufthansa Airline, despite being the largest revenue driver, suffered a €94 million loss, highlighting the urgent need for an economic turnaround (affecting the net margins and profitability).
  
• The higher operational costs have been driven by increased staff costs due to tariff agreements and inflationary pressures, which reduced productivity and increased financial burden (impacting net margins).
  
• Continued infrastructure bottlenecks and challenges in aircraft deliveries pose risks to operational efficiency and planned capacity growth, potentially affecting revenue and profitability (impacting revenue and free cash flow).
  
• Restrictions on accessing Russian airspace put Lufthansa at a competitive disadvantage on long-haul Asian routes, resulting in reduced capacities for Asia and impacting revenue from this market segment (affecting revenue and market competitiveness).

Valuation

• The analysts have a consensus price target of €6.916 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 €5.0.
• 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 5.5x, assuming you use a discount rate of 7.7%.
• Given the current share price of €6.21, the analyst price target of €6.92 is 10.3% higher.
• 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.