Shares in Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) have taken very different flight paths. One is soaring close to a 10-year high while the other is struggling to climb above its record lows.
No prizes for guessing which is which, but one has to wonder if it is time to sell Qantas and buy Virgin Australia given how far blown out the performance gap is between the two dominant Australian airline stocks.
Just to put things in perspective, shares in Qantas have more than doubled in the past year while Virgin has nosedived by around 20%!
Different Flight Paths: Qantas vs. Virgin Australia
Source: Google Finance
Virgin caught a small break yesterday with its shares increasing 6.3% to 17 cents after the airline gave an upbeat update to the market. Management said it expected to report a "positive free cash flow performance" for FY17 of between breakeven and $50 million.
This would represent a $90 million to $140 million improvement on the same time last year. Shareholders will also be happy to hear that its cash balance will be higher in the June quarter compared with the previous quarter even as management continues to pay down debt.
Its frequent flyer Velocity program is also bouncing back from a disappointing first half with earnings before interest and tax (EBIT) tipped to be 10% to 13% higher than the previous corresponding period.
It's a small win but Virgin shareholders will be grateful for any positive news.
But there are some who believe that Qantas is similar to our Big Banks – that it operates in an industry that is dominated by a few giants. From that perspective, a strong leader like Qantas should be trading at a comfortable premium.
Certainly the stock doesn't look particularly stretched with its forward price-earnings (P/E) of 11.5 times when its capex requirements are falling and profitability is rising.
I think Qantas should comfortably be able to trade well over $6 in the not-too-distant future but I won't be buying the stock. This is because I get uncomfortable with talking about premiums when it comes to airline stocks. Unlike a bank, there are too many externalities that can impact on airline companies compared to many other industries.
In my view, an airline should be bought when it is at deep value to account for the risks as opposed to using premiums to justify its price. This isn't to say I am willing to buy Virgin at this point either, as there needs to be further signs of a turnaround before I am happy to take a punt on the stock.
The fact is, there are better value and less risky stocks out there, even within the transport sector. Some stocks I would consider before Qantas or Virgin include port and logistics company Qube Holding Ltd (ASX: QUB) and tollroad operator Transurban Group (ASX: TCL).
If you are looking for other investment ideas for the new financial year, click below to see what better alternatives the experts at The Motley Fool have found.
