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Qantas drops to all-time low, time to buy?

As Warren Buffett once said: “It pays to be greedy when others are fearful, and fearful when others are greedy”. Could this theme now be applied to Qantas (ASX: QAN)?

The broader Australian media have given Qantas unprecedented coverage over the past three weeks, and in the last week have lashed the airline and its management for guiding the company to only its second loss since it was privatised in 1995. Qantas announced an expected $300 million pre-tax loss for the 6 months to 31 December 2013, and a survey of six analysts by Bloomberg has a consensus forecast of a $428 million loss for the full year to June 2014. It’s fair to say that the events of recent weeks have made investors fearful about Qantas. The share price on Tuesday closed at its lowest ever level of 96.5 cents, down over 22% in the past month.

Buffett’s quote above shouldn’t be taken in isolation. He’s been a vocal critic of airlines for years and just earlier this year said: “Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results” and that the “airline industry [has] been a death trap for investors”.

In terms of listed airlines on the ASX, it appears he has a reasonable point. Over a 10-year period, the four main listed airlines on the ASX have underperformed the ASX 200 (ASX: XJO). The ASX 200 is up nearly 60% over 10 years, while Qantas is down 71%, Virgin Australia Holdings (ASX: VAH) is down 85%, Air New Zealand (ASX: AIZ) is down 26%, and smaller operator Regional Express (ASX: REX) is down 9%.

So is it a buy now?

The numbers above certainly backup Warren Buffett’s claim that airlines are great at destroying shareholder value over long periods of time. Looking at the 10-year chart however, there were a number of one-year periods that Qantas returned in excess of 20%. However, with Qantas now trading at all-time lows it would take a brave investor to purchase a large stake in the company.

It seems as though most bad news is priced into the current valuation, however further downgrades, capital raisings or exceeding the expected full-year loss could see further falls in the share price. Catalysts for share price gains include a turnaround in yields, successful implementation of restructuring efforts, and assistance from the government.

All sound a bit risky?

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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