EasyJet flies lower on Goldman, Davy downgrades; IAG gets a boost

Shares in budget airline easyJet flew lower on Friday as Goldman Sachs and Davy downgraded their stances on the stock.

Goldman downgraded easyJet to ‘neutral’ from ‘buy’ and cut the price target to 970p from 1,160p, citing a deteriorating free cash flow outlook.

The bank said ongoing pricing pressure on intra-European routes, combined with FX headwinds, will put pressure on easyJet’s profitability. It expects an average 2017-19E earnings before interest and tax margin of 8.4% versus 12.5% for 2013-16E. As a result, it forecasts negative free cash flow and increasing leverage going forward, raising questions around the sustainability of dividends.

EasyJet was also hit by a downgrade to ‘neutral’ from ‘outperform’ by Davy, which said: “We think that easyJet now has big decisions to make – is it a dividend yield or growth stock?”

It added: “The dividend pay-out ratio of 50% of profit after tax results in a c.4% dividend yield. However, given the drop in returns and the significant capital expenditure programme and dividend requirement, it results in negative free cash flow for the next number of years.”

Davy cut its price target on EZJ to 850p from 1,100p.

Iberia and British Airways parent International Consolidated Airlines Group was faring a lot better, however, after GS upgraded it to ‘buy’ from ‘neutral’ and lifted the price target to 580p from 490p, citing an attractive valuation and strong free cash flow yield.

GS argued that IAG has the most attractive exposure to the North Atlantic among EU flag carriers. In addition, it highlighted the strongest free cash flow yield, forecast at 9% in 2018, and said this should give scope for cash distribution and deleveraging.

Davy reiterated its ‘outperform’ on IAG on Friday, bumping up the price target to 610p from 460p.

RBC Capital Markets also turned more positive on IAG, lifting it to ‘sector perform’ from ‘underperform’ and raising the price target to 450p from 375p.

“UK GDP is better than we expected since we set IAG forecasts and as outlook is more positive, our underperform rating has been wrong. We reflect this, and tighter 2017 Atlantic seat outlook, and move to sector perform.”

At 0935 GMT, EZJ shares were down 1.9% to 976.50p, while IAG was up 2.6% to 504p.