Qantas Airways Limited (ASX: QAN) is one of the best blue chip performers of 2015, its shares have risen more than 100% over the past year – in spite of the falling market. So what does the future hold for the Qantas share price?
Tailwind propulsion
It's true, over time, share price follows profit, but it couldn't be truer for Qantas, Australia's leading airline operator. When oil prices were riding high, over $US100 a barrel in 2014, Qantas' share price was in the doldrums because it couldn't make a profit.
However, between 2014 and 2015, oil prices collapsed as the global oversupply glut worsened. For Qantas, a falling oil price means lower fuel costs. For example, between 2014 and 2015 Qantas' fuel bill dropped from $4.45 billion to $3.94 billion – a $500 million saving. Meanwhile, depreciation and amortisation fell heavily, and a robust 8% jump in Jetstar's revenue combined, with a strong international business, pushed revenue 3% higher year over year.
All things considered, Qantas achieved a net profit of $560 million in its 2015 financial year (FY15), up from a loss of $2.8 billion. The market responded with a surging share price, preceded by numerous broker and credit rating agency upgrades.
Clear skies ahoy!
Qantas CEO, Alan Joyce, and his team can certainly take some of the credit for sweeping changes made at the executive level that spurred on last year's profit result. However, the direction of the oil price is anyone's guess.
Indeed, should either US or Saudi Arabian producers decide to cut back on daily production to shore up the market; it'd have an adverse impact on oil prices and, therefore, the profit of major airlines like Qantas, AIR N.Z. FPO NZ (ASX: AIZ) and Virgin Australia Holdings Ltd (ASX: VAH).
Nonetheless, analysts polled by Morningstar seem content with Qantas' outlook. According to analysts surveyed, earnings per share are expected to climb to 53.3 cents per share this year – up from 32.1 cents in FY15. That'd place Qantas shares on a price-earnings ratio of just 7x and, based on analysts' forecasts, a dividend yield of 2.4%.
Of the 14 analysts surveyed by The Wall Street Journal, 11 currently have a buy rating on Qantas shares, with the average price target of those surveyed being $4.41 – 18% higher than today's share price.
Foolish takeaway
Qantas boasts one of Australia's most iconic brands and a market-leading position. Unfortunately, while the recent swing to profitability caught many investors off guard, I think it's for good reason. The recent turnaround serves only as a reminder for investors as to how fickle airline stocks can be.
Joking to a group of business students, Warren Buffett famously said, "I now have an 800 number I call every time I think about buying a stock in an airline. I say, 'I'm Warren and I am an air-aholic."
Sir Richard Branson, the founder of Virgin, famously quipped, "If you want to be a Millionaire, start with a billion dollars and launch a new airline."
Words to live by.
