Sunday 20 October 2013

Analysis of Lufthansa

A German aviation and service company

Company: Lufthansa

Business: A German aviation company that are divided into five segments: Passenger Airline Group (transporting over 100 million people per year, 32% of profit), Logistics (airfreight, 13% of profit), Services (repair services to over 700 airlines, 40% of profit), Catering (27% market share with LSG Sky Chefs, 12% of profit) and finally IT Services (consultancy to other airlines etc., 3% of profit)

Active: They are active world wide either on their own or though affiliates.

P/E: 6.7

Comment: On the executive board two out of five are women which to my knowledge tends to lead to more long-term strategy goals with focus on value growth but I might be wrong.

contrarian values of P/E, P/B, ROE as well as dividend
The P/E for Lufthansa is excellent with 6.7 and the P/B is also great with 0.8 which gives according to Graham a very clear buy (however Graham did not approve of airline companies since they spend too much money on maintenance and to keep their fleet at an acceptable level of safety). The earnings to sales are not that impressive with 3% and the ROE is ok with 12%. The book to debt is slightly to low for me with a ratio of 0.4. In the last five years they have had a yearly growth of 3.9% which is great and we therefore end up with a motivated P/E of 13 to 16 which means that Lufthansa is strongly undervalued on the market today. They paid no dividends last year and in the last eleven years they have paid out dividends on eight of those in values between 2.5 to 6%.

Conclusion: I find Lufthansa extremely hard to judge. Graham really said that one should never buy airline companies and also Buffett says that even though he bought his on private jet "rental" company which he semi regretted. Munger was also not so happy about it and only gave as remark that Warren never discussed it with him before making THAT investment. Back to Lufthansa... the reason why I added the % of profit is because the question is what is Lufthansa today? Over 50% of their profit (Maintenance + Catering) is being generated to a large extent from external customers which means that Lufthansa is much more of a service company than an aviation company. Looking upon Lufthansa as an aviation company that paid no dividends, with low book to debt and only 3% earning to sales and 12% ROE, I therefore decide not to invest in them today.

But is that stupid of me? What do you guys say about Lufthansa? Should we look upon it as an aviation company or service company? Because if one looks upon it as a service company then Lufthansa at least becomes slightly more interesting...

Should it be added to the Stocks of Interest list?

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