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Here’s why Credit Suisse upgraded Qantas to “buy”

The Qantas Airways Limited (ASX: QAN) share price is trading at the bottom of its 52-week trading band but Credit Suisse doesn’t think it should be stuck there and has upgraded the stock to first class.

The Qantas share price has dived 16% over the past year when S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index rallied close to 8%, although at least the flying kangaroo is still ahead of its struggling competitor Virgin Australia Holdings Ltd (ASX: VAH) which has plunged by more than a quarter.

But things could be looking up for Qantas if Credit Suisse is on the money. The broker pointed to a few potential tailwinds for the stock as it bumped Qantas to “outperform” from “neutral” and raised its share price by 40 cents to $6.40 a share.

Qantas to benefit from these tailwinds

The federal election result is a clear positive for corporate travel demand, explained Credit Suisse, but that’s not the only reason why the broker is feeling bullish on the stock.

“On Friday, new CEO at competitor Virgin Australia, Paul Scurrah committed to stronger domestic capacity discipline starting with immediate capacity cuts. This is clearly positive for Qantas’ Domestic and Jetstar businesses (>70% of Group EBIT),” said Credit Suisse.

“The clear election result (no hung parliament) is likely to now be positive for corporate travel demand that has been weak in the run up to the election.”

Not having a Labor federal government also means there’s less risk of unionised labour unrest and a higher wage bill.

“We forecast Qantas Domestic competitor Virgin to both cut capacity 1% in FY20. We raise RASK [unit revenue] growth forecast to 3% from 2.1% for both Qantas Domestic and Jetstar in FY20,” added the broker.

“In comparison, we forecast Virgin Domestic to achieve 4% RASK growth. Our FY20 PBT [profit before tax] for Qantas rises 7%.”

Foolish takeaway

What’s more, Qantas jumped at the opportunity to fully hedge its FY20 fuel price risk when crude oil declined recently and this higher than normal level of hedging puts it in a better position than its rivals.

Let’s just hope the escalating trade war between China and the US doesn’t derail global growth and curb demand for travel.

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Motley Fool contributor Brendon Lau 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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