Should you sell your Qantas shares?

Qantas Airways’ (ASX: QAN) story is one of remarkable turnaround since the COVID-19 pandemic in 2020 threatened the company’s very existence. Quick action was taken by management to right-size the business and raise capital to survive the lean times. While many measures were controversial, one can’t argue the flying kangaroo’s success during the travel boom that followed the removal of travel restrictions.

QAN’s profits have soared, and shareholders have reaped the rewards of a similarly soaring share price. The company is the third best-performing stock over the last 12 months among the ASX Top 50 and, as of Friday’s close, was trading at an all-time high.

Much of Friday’s strength could be attributed to a positive response to a trading update issued by the company. In it, the company said first-half FY25 trading conditions were tracking in line with expectations, with both Qantas and Jetstar operations seeing stable demand across their respective segments. With QAN’s shares flying high, we checked in with Australia’s biggest brokers and research houses to see if they think the stock is a buy, hold, or sell.

FY 25 Guidance Update

• Jetstar Domestic’s unit revenue is outperforming previous expectations due to stronger-than-anticipated travel demand
• Qantas Domestic’s load factors and demand for corporate travel continue to improve year-on-year
• Group Domestic Revenue per Available Seat Kilometer (RASK) is expected to increase 3-5% in H1 FY25 compared to H1 FY24
• Group International RASK remains unchanged and is still expected to decline 7-10% in H1 FY25 compared to H1 FY24
• Qantas Loyalty is trading in line with expectations and is on track to grow underlying EBIT by 10% in FY25
• An unstable geopolitical environment continues to create “volatility” in fuel prices, but the group is hedged, “with strong participation should jet fuel prices fall from here”. Expected fuel cost for the first half is now estimated at approximately $2.55 billion
• Around 27,000 Qantas Group employees would receive a “thank you payment” totalling $28 million, the cost of which would be recognised in H1 FY25
• The $400 million on-market share buy-back is approximately 45% complete, at an average price of $7.23. It should be completed by the end of the calendar year

Individual broker views

E&P: Retain POSITIVE | Target price: $8.66⬆️ vs $7.30

• Strong trends in domestic travel and stable international trends, against disciplined cost controls and potential fuel cost benefits put QAN in a strong position. Broker views stock as attractively priced given current price to earnings ratio (PE Ratio), and anticipates an imminent dividend reinstatement along with other potential capital returns given company’s robust balance sheet.

Jarden: Downgrade to OVERWEIGHT from BUY | Target Price: $8.15⬆️ vs $7.10

• Broker notes strong performance in domestic travel and fuel cost improvements as drivers for earnings, and therefore share price value. The reinstatement of the dividend could create renewed investor interest and the stock continues trade at an attractive valuation. Retains a positive outlook.

Macquarie: Retain OUTPERFORM | Target price: $8.40⬆️ vs $6.60

• Broker notes both RASK and fuel savings were better than expected, acknowledges resilience in loyalty program’s growth. Continued superior shareholder value can be created via ongoing capital management initiatives such as buybacks, but also the imminent reinstatement of the company’s dividend. The company should be valued at a premium to its peers.

Morgans: Downgrade to HOLD from ADD | Target price: $8.50⬆️ vs $7.50

• Broker approves of improved earnings outlook but notes the update was largely in line with its expectations. Despite increasing underlying earnings forecasts for FY25, the broker feels that the recent share price rally has reduced the value in the company’s stock, and this is what has triggered the downgrade in the rating.

Ord Minnett: Retain BUY | Target price: $10.00⬆️ vs $8.00

• Broker considers the update is akin to a 7% increase in previous earnings guidance, and is up around 18% on the previous corresponding period. The update also suggests “sustainable growth” for QAN over the next 3-5 years, to be driven by investments, non-fuel unit cost reductions, and capacity discipline. QAN shares deserve to trade at a premium to its peers.

UBS: Retain BUY | Target price: $8.60

• Broker lauds QAN’s capacity management, noting it has preserved its pricing power in domestic travel. Also pleased with employee bonus, suggesting it will promote loyalty. Moving forward, the reinstatement of the dividend will be a key driver of shareholder value. Strong domestic travel trends and disciplined cost management should underpin earnings growth.

Qantas Airways broker consensus: Buy, Hold, or Sell?

The above table shows all ratings and targets for QAN from broker research notes since May 1 (to keep it current). To obtain QAN’s Broker Consensus Rating, we assigned a value of +1 to any rating better than HOLD/NEUTRAL/MARKETWEIGHT, a value of 0 for any rating equivalent to HOLD/NEUTRAL/MARKETWEIGHT, and a value of -1 to any rating worse than HOLD/NEUTRAL/MARKETWEIGHT.

We then take the average of all assigned – rating values and assign a Broker Consensus Rating of BUY to average rating values greater than +0.5, a rating of HOLD for average rating values between -0.5 and +0.5, and a rating of SELL for average rating values less than -0.5.

Using this model, QAN’s average rating value is +0.77 – down from +0.85 prior to its FY25 trading update – but resulting in the stock’s Broker Consensus Rating remaining at BUY.

QAN’s consensus (average) target price is $8.02, up 7.4% from $7.47 prior to its FY25 update. This suggests brokers collectively believe the stock is around 0.1% overvalued based upon the closing price on Friday 25 October of $8.03.

It’s worth noting that the consensus price target may change over the next few days as the brokers we have on file who have not yet updated their analysis on QAN post-update may do so. Given there have substantial increases to most brokers' target prices so far, there is a very good chance QAN’s consensus target will rise, therefore improving its Upside potential.

This article first appeared on Market Index on Monday 28 October 2024.