Should You Buy Qantas Shares at This Price?

What happened to the QAN share price?

Qantas Airways Limited [ASX:QAN] was down today. By afternoon trading, it had already lost 2.4% on yesterday’s close. QAN was one of the strong momentum stocks of 2015. However, 2016 has seen a turn of fortune for QAN investors.

Why did QAN shares do this?

By early May 2016, Qantas revised down its capacity expansion plans due to lowered forecasted domestic demand. This revision no doubt crushed the excitement that had been supporting the stock. It resulted in a sharp drop in the QAN stock price in April.

Now investors need to ask a few questions. The first one is, what kind of investor am I? For short term investors there is no reason to get into QAN. The reality of lower expected demand in Australia hasn’t changed, and it will not change in the near term. One can argue on technical terms that the stock may see some near-term reversals upward, but that view is far from certain. In my view, QAN is not a good short term reversal-trading target, simply because there is no strong evidence for why it would reverse.

If you are a long term investor, things should be very different. For one, the company is cheap by valuation. Forward multiples show Qantas is trading at a cheaper level than its peers and the sector in general. The airline itself is expected to generate more revenue and earnings this year and next year.

The company has a good profit margin and is not terribly leveraged. Combine those with a relatively high ROE (return on equity) ratio, it should not be hard to see the value in the airline. That is precisely why a long term investor might consider buying into the stock at the current low point.

What now for QAN?

Will QAN stock price pick up soon? There is certainly no strong evidence for that. However, if you are investing for the future, the fundamental metrics should be exciting enough for you to at least consider the stock.

If QAN falls further, it should be purely due to technical momentum. However, if a combination of energy price rally and further weakening in demand start to eat away at the company’s currently-profitable business model, then I expect the stock to fall farther.

But I believe any energy rally will be limited this year. Weak demand will persist, but it will not cause a severe drop in travelling. Therefore, I believe QAN is a good stock for long term investors.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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