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Why I’m putting a sell on Qantas Airways Limited (ASX:QAN) shares

In 1999, Warren Buffett penned an article to Fortune magazine that contained information paramount to investor success. In his message, he noted that despite the impact airlines have had on society, the frequency of failures and lack of returns have made them poor investments.

Airline travel is considered by many to be a commodity. This results in points of meaningful differentiation being based around price, and as a result higher competition is directly linked to shrinking profit margins.

If there is an airline in the Australian market that can lay claim to a competitive advantage outside of price, it is Qantas Airways Limited (ASX:QAN). The iconic brand has never had a fatal jet airliner accident.

Qantas provides international and domestic air transportation services, the sale of worldwide and domestic holiday tours and associated support activities including catering, information technology, ground handling and engineering and maintenance.

In recent memory, Qantas has flown higher than industry and share market rival, Virgin Australia Holdings Ltd (ASX:VAH). Since 2013, the Qantas share price has grown 364% compared to the 55% decline by Virgin,

Qantas’s share price growth is mirrored by its earnings per share history. Since 2013, earnings per share have grown from $0.10 to $0.55 as at 30 June 2017.

In the last four years, per share, Qantas has retained $1.50 in earnings for only $0.71 in book value growth. This is even worse if you include the 2013 figures with the equation becoming $1.60 in retained earnings for a $0.66 reduction in book value.

Despite this rather damning perspective, the market continues to prop the share price up and with a P/E ratio of 10, shareholders appear to have a leg to stand on.

However, total revenues are void of significant growth in the last 10 years of relatively strong economic conditions. Whilst market sentiment is impossible to predict, should a recession occur, revenue appears vulnerable.

Additionally, Qantas has a debt to equity ratio of 1.37:1 and it appears poorly positioned for a market downturn.

Foolish takeaway

Qantas’s inefficient allocation of profits is enough for me to avoid this company. Furthermore, my opinion is compounded by the commodity-like nature of its services and high debt levels. I believe this creates too much exposure to potential losses.

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Motley Fool contributor Matt Breen has no position in any of the stocks mentioned. 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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