In morning trade the Qantas Airways Limited (ASX: QAN) share price has edged 1.5% higher to $6.16.
This small gain means the airline operator’s shares have now climbed 22% since the start of the year.
Is it too late to buy Qantas shares?
The recent crash in the oil price may have been a big blow to the likes of Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL), but it’s a major bonus for a fuel guzzler like Qantas.
In FY 2018 Qantas spent $3,230 million on fuel and forecast an increase to $3,920 million in FY 2019 at the time of its results. This was later revised upwards to $4,090 million after oil prices surged higher earlier this year.
Although the company was confident that it would offset rising fuel costs, I was a touch concerned that not all the rises would be able to be passed on to customers. So, it’s pleasing to see oil back down in the US$50s a barrel range again.
Especially because of the way Qantas hedges its fuel. The company hedged 76% of its fuel for FY 2019 and 39% for FY 2020, giving it the ability to benefit from the significant price falls that have occurred over the last few weeks.
Barring any sudden spike in prices from supply cuts, I think this means Qantas is well-positioned to deliver another couple of years of bumper profits. Because of this, I feel it could be worth considering the airline as an investment right now.
I’m not alone in thinking this way. This morning a note out of Deutsche Bank revealed that it has upgraded Qantas’ shares to a buy rating from neutral with an increased price target of $6.90.
This price target implies further upside of over 12% for its shares over the next 12 months.
The broker made the move on the back of the decline in the Brent crude oil price and its fuel hedging model. In addition to this, the broker believes Qantas is benefiting from strong demand and higher domestic ticket prices.
While rival Virgin Australia Holdings Ltd (ASX: VAH) may also benefit from lower fuel costs, I would suggest investors stick with Qantas as I feel it is a far superior business.
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Motley Fool contributor James Mickleboro 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.