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Top broker adds Qantas shares to its conviction buy list

In morning trade the Qantas Airways Limited (ASX: QAN) share price has pushed higher for a second day in a row.

At the time of writing the airline operator’s shares are up 1% to $5.84.

Why is the Qantas share price on the rise today?

The catalyst for this gain is likely to be a favourable broker note out of Goldman Sachs this morning which revealed that it has added Qantas shares to its coveted conviction buy list.

According to the note, the broker has made the move after the jet fuel price fell to a 14-month low and its commodities team lowered their calendar year average Brent crude oil price.

This month the jet fuel price fell to a 14-month low of US$71 a barrel, down 28% from its peak of US$98 a barrel in October. The key driver of this has been a 37% drop in the price of Brent crude oil from its October high.

And with softening demand, rising supply, and the growing ineffectiveness of OPEC to manage the supply balance, Goldman doesn’t expect a meaningful rebound this year and has downgraded its Brent crude oil price forecast to US$62.50 a barrel from US$70 a barrel.

Goldman notes that with fuel representing around 30% of operating costs, the profitability of the global airline industry is inherently tied to the price of jet fuel.

As a result, it believes Qantas and its peers are likely to benefit from lower fuel costs, leading to stronger than expected earnings this year and next.

It has lifted its profit before tax forecast for Qantas by 13% and 14% respectively, to $1,525.2 million in FY 2019 and $1,910.4 million in FY 2020.

Where is the Qantas share price heading from here?

Goldman has placed Qantas on its conviction list with a buy rating and $7.64 price target, which represents potential upside of approximately 32% from its last close price.

Rival airline Virgin Australia Holdings Ltd (ASX: VAH) also received an upgrade, albeit only to neutral with a price target of 22 cents.

Should you invest?

I agree with Goldman that Qantas is a buy at these levels and believe it could provide market-beating returns for shareholders this year if oil prices remain in line with the broker’s forecasts.

Because of this, I would sooner be buying Qantas shares than energy shares such as Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL).

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.

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