Here’s how Qantas Airways Limited shares could be a massive bargain today

The share price of Qantas Airways Limited (ASX: QAN) soared around 3% today to $3.80 as investors continue to re-rate The Flying Kangaroo’s potential to benefit from the possibility of a structural shift in the future of oil prices.

Qantas’ fuel bill is one of its largest operating costs and the airline has also been busy permanently slashing other fixed overheads related to staff wages and ground control operations under the ‘Qantas Transformation Program’ aimed at delivering $2 billion in cost savings.

The result is a streamlined airline that recently announced it expects to report a ‘first-class’ underlying profit before tax of between $875 million to $975 million for the six months ending December 31 2015.

The key driver of the increased profitability though is the falling fuel bill as new extraction technologies in the US continue to put a downward pressure on oil prices that may in fact mean a dramatic structural shift in the long-term outlook for oil as the price stays lower for longer. If this scenario is accurate the airline’s shares may only just be taking off.

Indeed, according to Thomson Reuters consensus estimates analysts are now forecasting the airline to pay out dividends per share of 9.2 cents in FY16, 13.6 cents in FY17 and 16 cents in FY17. If these forecasts are accurate the airline could be on a respectable yield in the region of 2.4% to 4.2% in the years ahead.

There’s also the possibility Qantas could continue to beat expectations as costs tumble and an uptick in the economy sees demand rise for a service backed up by a strong brand.

On the other hand if the oil price were to sharply rebound over 2016 investors could expect to see Qantas shares fall heavily, while other risks remain around the possibility of a global travel slowdown due to an act of terror or health pandemic for example.

Qantas shares then could travel higher in the future, but it remains a high-risk prospect, with plenty of risk to the downside.


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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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