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Top broker slaps $5.50 price target on Qantas Airways Limited shares

The Qantas Airways Limited (ASX: QAN) share price has been on a tear in 2015, flying more than 50% higher. However, research from analysts at Credit Suisse suggests it could get even better for investors in ‘the Flying Kangaroo’. Shares were trading 1.8% higher this morning.

According to the Fairfax Press, Credit Suisse analysts have started coverage of shares in Qantas, slapping them with a $5.50 price target and an ‘outperform’ rating. Qantas’ share price closed at $3.87 yesterday.

The investment bank is forecasting Qantas to pay special dividends of 50 cents per share this year and next. “We forecast special dividends of 50 cents for this year and next ($2.1bn total),” Fairfax quoted the analysts as saying. Lower fuel prices, market pricing and management cost-outs will enable Qantas to generate free cash flow of more than $3 billion, the bank said.

According to a survey of analysts by The Wall Street Journal, the consensus intrinsic value estimate for Qantas shares is $4.66. Of the 14 analysts surveyed, 11 have ‘buy’ recommendations on Qantas, with just one suggesting investors ‘hold’ and another being ‘underweight’.

Last week, Qantas upgraded its profit before tax expectations for its 2016 first half to between $875 million and $925 million. For comparison, in 2014, Qantas posted a $2.84 billion loss, blaming higher fuel prices, weak demand and low confidence levels as catalysts for the poor result.

Fast-forward two years and oil prices have fallen from around $US110 per barrel to just $US36.87 per barrel. The full effect of the plunging oil price hasn’t been completely reflected in Qantas’ financials. That’s why many analysts, like Credit Suisse, believe the market is underestimating Qantas’ future profit performance. Nonetheless, between 2014 and 2015 the company’s fuel bill fell by more than $500 million.

Foolish takeaway

If the recent turnaround in the fortunes of Qantas, Virgin Australia Holdings Ltd (ASX: VAH), and – to a lesser extent – Air N.Z. FPO NZ (ASX: AIZ) has taught us anything, it’s that companies in commodity-related markets will swing dramatically from one extreme to the other. Unfortunately, the recent positive market dynamics (lower fuel prices, positive capacity pricings and regulatory environment) are outside the control of Qantas’ management. Therefore, they will (one day) drift back towards an equilibrium. Meaning, the good times will not last forever.

As a long-term investor, I prefer to hold shares of companies that can control the market price of their product and their profit margins. Therefore, I do not believe holding shares of airlines is a good idea. As Richard Branson, the Virgin founder, famously quipped: “If you want to be a millionaire, start with a billion dollars and launch a new airline.”

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Motley Fool writer/analyst Owen Raszkiewicz has no position in any stocks mentioned.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

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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