Qantas Airways Limited (ASX: QAN) shares have come a long way in the last 18 months. Only 19 months ago, Qantas's shares were sitting at an all-time low of 96 cents after the company announced the end of 1,000 jobs and a pre-tax loss of up to $300 million in the 6 months to December 31 2013, compared to a $223 million profit in the 6 months to December 2012.
At the time, CEO Alan Joyce blamed the airline's woes on aggressive competition in its domestic and international businesses and announced a massive structural review to cut costs.
It Worked!
Amazingly, everything Mr Joyce has orchestrated since then has worked (albeit helped along the way by a much lower oil price). The result for investors? A 275% rise from 96 cents to a high of $3.60 in May this year.
His cost savings (both deliberate and convenient) have seen Qantas report its best half-year result for four years in December 2014, delivering underlying profit before tax of $367 million, higher than the average analysts' forecasts for $339.3 million. At the time, analysts believed that better-than-expected savings from the group's transformation program and the potential for a share buyback this year would see the group continue to outperform the market.
Since then however, the shares have fallen a massive 15% to today's price of $3.15, including a 3% fall just today!
Time to Invest?
The logical question now is whether Qantas represents good value at today's price. I would contend that despite analysts holding an almost unanimous 'buy' call on the stock, there's a greater chance of downside, compared to upside, at today's price.
My colleague Christopher Georges explained well last week the challenges facing Qantas:
- Qantas has an extremely low return on assets
- Competition is tough!
- International operators are taking market share from Qantas.
- Risk of interruption to the industry is high from external factors (economic & terrorism)
- Qantas has a high cost base
- Qantas' profits will fall again if (or when) oil prices rise again.
So my thoughts are that there are plenty of companies that represent better value today. I will also never forget Richard Branson's quote that "If you want to be a Millionaire, start with a billion dollars and launch a new airline."
