Qantas Airways Limited (ASX: QAN) will tomorrow reports its financial results for the six months to December 31 2014 and analysts are expecting a sharp turnaround from the mammoth loss reported just 12 months earlier.
Triple Your Money
Qantas shares have, surprisingly for many, been among the best investments on the ASX over the last 12 months. After hitting a low of $1.03 as recently as March 2014, the share price has rocketed above $2.70 following a successful cost-cutting program, a reduction in the oil (and therefore fuel) price, and gradual improvement in passenger numbers.
What to Expect Tomorrow
Qantas is expected to report underlying profit before tax of between $300 million and $350 million for the first six months of the financial year. This compares with a loss of $252 million in the same period in 2014.
Of this improvement, Qantas is expected to attribute approximately $350 million to its extensive cost-cutting program, $30 million to the lower fuel price, and the remainder to better management of the group's capacity and yield.
Are Further Gains Possible?
Investors wondering whether there's any point jumping in now should consider waiting to see what Qantas' outlook statement is. To give you a feel of how severe this turnaround has been, if it can hit the above numbers this will be the best first half performance since the 2010 financial year.
So, there could be significant downside if Qantas disappoints with a poor outlook for the next 6 to 12 months. Analysts are expecting between $425 million and $500 million in underlying profit before tax for the full year, a huge turnaround from a $625 million loss last financial year, but still only representing earnings per share of around 20 cents.
High Risk, Mediocre Return
This forecast earnings per share represents a price to earnings ratio of nearly 14, roughly in line with the market, but with an extremely high level of risk in my opinion. Some analysts are predicting earnings to double in 2016, which would imply a price to earnings between 6 and 7, however investors must consider how realistic this is seeing how competitive the industry traditionally is.
