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Top fund manager says Qantas shares still show compelling upside

The Firetrail Australian High Conviction Fund named Qantas Airways Limited (ASX:QAN) shares as one of the top contributors to fund performance in the month of May.

The Qantas share price rose 10 per cent in May, and has been one of the top performers in the ASX 200 index over the past four years.

Despite the strong historical gains for the Qantas Airways share price, Firetrail say the company still shows “compelling upside.”

In early May Qantas shares jumped higher after the airline said it expects to post a record pre-tax profit of between $1.55 billion and $1.60 billion. That would beat the record $1.5 billion it made in 2016 and comfortably exceed last year’s $1.4 billion.

Firetrail said one of the most important factors they watch in their research on Qantas is airline industry capacity growth.

They noted over the past four years capacity in the domestic industry has reduced, enabling Qantas to both increase its capacity utilisation of aircraft, as well as the ability to increase ticket prices.

Firetrail is not overly concerned about the rising oil price, given fuel represents approximately 30 per cent of the Qantas cost base, saying the airline has been able to offset the significant oil headwind with both price and cost initiatives.

The fund remains confident about the outlook for Qantas due to the sustainability of current earnings.

Cheapest stock in the ASX 100

Last month Philip King of Regal Funds Management named Qantas as his top stock pick, saying Qantas shares were “the cheapest stock in the ASX 100.”

In a lengthy AFR interview last month, the team at Firetrail highlighted plumbing group Reliance Worldwide (ASX:RWC) and chicken processor Inghams Group (ASX:ING) as companies that have good earnings potential over the next three years.

Reliance Worldwide recently bought UK plumbing company John Guest, sending the Reliance Worldwide share price flying higher.

The Inghams Group share price took a beating last week after news that chief executive Mick McMahon will step down after four years at the helm.

Bruce Jackson is the founder of The Capital Club . This article was originally published here.

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Bruce Jackson does not hold a position in any of the companies mentioned above. 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 Scott Phillips.

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