Alten and TietoEVRY Shares Decline After BofA Downgrade Amid Market Weakness

Investing.com reports that shares of TietoEVRY and Alten experienced declines on Monday following analyst downgrades from BofA Securities. This reflects growing concerns regarding their growth potential amid ongoing weaknesses in critical end markets within the European IT services sector.

As of 5:27 am (0927 GMT), Alten’s shares were down by 4.8%, while TietoEVRY’s fell by 4.4%.

BofA has downgraded Alten to “underperform,” citing ongoing challenges stemming from a slowdown in essential markets that contribute two-thirds of its revenues. Key sectors such as automotive, aerospace, and life sciences are particularly affected, highlighted by profit warnings from major European automotive firms like Stellantis, Volkswagen, Daimler, and BMW.

The aerospace industry is similarly pressured due to ongoing supply chain issues at Airbus. Additionally, cuts to IT budgets in retail and public sectors have exacerbated the difficulties faced by Alten, with analysts noting a sustained decline in discretionary IT spending.

In response to these challenges, BofA has adjusted Alten’s financial outlook, reducing its organic growth forecasts for 2024 and 2025 from 0.9% and 3% to flat and 2%, respectively. These new estimates now fall 2% to 3% below consensus revenue expectations for those years. Projected organic revenue declines for the third and fourth quarters are expected to reach -0.9% and -0.8%, compared to a slight growth of 1.0% in the second quarter.

Analysts highlighted that Alten’s operational strategy to double its offshore development capacity involves execution risks and necessitates further investments that could pressure margins.

The report from BofA indicates that while Alten holds a strong position in engineering R&D services, the near-term growth outlook is hindered by low visibility regarding demand recovery. With a 28% drop in share value year-to-date, Alten’s shares are currently trading at a 28% discount to their five-year median P/E ratio. BofA has set a new price target of €92, down from €125, indicating a potential downside of approximately 5% based on a 12x P/E multiple for 2025, reflecting the weakened growth outlook.

Similarly, TietoEVRY has also been downgraded to “underperform,” citing similar weak end-market trends that may prompt further reductions in its fiscal year guidance.

BofA analysts predict a soft average organic growth rate of -1.5% for the European IT services sector in the third quarter—slightly improved compared to previous quarters but still highlighting persistent difficulties. They noted the slowdown in public sector spending in the UK and France, coupled with uncertainty about budget allocations, is likely to delay the recovery of project-based and discretionary IT spending into the first half of 2025.

BofA has reduced TietoEVRY’s 2024 organic growth estimate from -0.2% to -1.1% and has slightly adjusted its EBITA margins downward to 12.6%. Consequently, the brokerage has cut its adjusted earnings per share estimates for 2024 and 2025 by approximately 3% and 6%, respectively, with a new price target for TietoEVRY set at €18, down from €20, suggesting no upside potential based on an unchanged P/E multiple of 8.5x for 2025.