Warren Buffett has previously mused that he needs a "helpline" to phone whenever he gets tempted to buy an airline stock. It's a warning worth heeding when arguably the world's greatest investor singles out one industry as so difficult to accurately analyse that even he won't touch it.
Despite those words of warning there are obviously many investors – 124,205 shareholders according to last year's annual report – who are presumably comfortable owning Qantas Airways Limited's (ASX: QAN) stock. No doubt last week's full year result was too much for some shareholders and they threw in the towel. However the results do offer some hope for investors who are comfortable investing in the airline sector.
Statutory vs. Adjusted Profits
Part of the job of an investor is to make sense of a company's financial results. This can involve a number of processes but one important step is to determine the "real" earnings of the firm. "Real" has lots of other names including adjusted, management, look-through and owner earnings.
Then there is the statutory result. This is also referred to by a number of titles including reported and "accounting" profit. If you are a long-term shareholder in a company then arguably there is merit in looking at the statutory results as these capture the "mistakes" made over the many years you have owned a stock. Mistakes such as overpaying for an asset which must subsequently be written down – that's a real loss of cash.
However, as an outsider looking in, or for an insider looking-forward and analysing a company, you are generally better off considering the adjusted result as this strips out the "one-off" items, such as a significant write-down and instead gives you a view to the underlying earnings power of a business.
Newspaper headlines focus on $2.8 billion loss
In the case of Qantas' FY 2014 result last week, the news headlines chose to focus on the statutory loss – in all likelihood simply because it was such an enormous number and makes for the kind of headlines that "sell newspapers".
Investors meanwhile will be more interested in the underlying profit before tax result which was indeed still a loss but a significantly lower loss of $646 million. Even more importantly than this, investors are interested in expectations and forecasts for next year's earnings.
Outlook not so bad
With Qantas' share price having fallen 43% over the past five years the stock's recent support which has sent the it towards its 52-week high suggests investors are increasingly confident about the future.
That confidence is at least in part built upon a major transformation strategy which has seen the cost-base reduced with expectations that Qantas will achieve $2 billion in benefits by FY 2017 and be free cash flow positive from FY 2015 onwards.
Airlines will always be tricky and there's nothing wrong with avoiding the sector all together, but for those investors who are comfortable investing in the sector, now could be an opportune time to look more closely at this business.