The Qantas Airways Limited (ASX: QAN) share price will be on watch today after analysts at Goldman Sachs clipped its wings.
What did Goldman say?
According to the note, the broker has taken the airline's shares off its conviction buy list and downgraded them to a neutral rating with an improved price target of $6.88.
The broker made the move on valuation grounds after a strong share price gain since August limited the upside for its shares.
Since the day before the announcement of its full year results, Qantas' shares have rallied 12% higher, compared to a 1% gain by the benchmark S&P/ASX 200 index.
Goldman believes this strong gain was due to the market becoming "more comfortable with our view the Group will be able to improve its RASK to offset any unit cost inflation, given: (i) both domestic and international competitor capacity remains constrained; and (ii) near term fuel costs are largely hedged."
And while it remains positive on its long term outlook, it sees limited upside in the near term based on its medium term outlook.
It explained: "We note that our view of the longer term outlook is unchanged. While the competitive environment both domestically and internationally has improved, underlying domestic passenger volumes have been soft and there remains uncertainty regarding international passenger flows (we expect inbound capacity to decline for the first time in CY19 since CY15). Further, while the oil price (and jet fuel prices) have retraced back to levels in line with our estimates, we note that the A$ has also experienced some weakness during that time."
Should you invest?
Whilst I can understand why Goldman has downgraded Qantas' shares following its strong share price gain, I still see value in its shares for income investors. Especially in this low interest rate environment.
If its shares were to reach Goldman's price target of $6.88, it would mean a gain of 7.5%. And if you add in its estimated 4.2% dividend yield, this total return over the next 12 months stretches to almost 12%.
I think that is an attractive potential return and would suggest investors consider picking up shares if they pull-back on Wednesday.
Overall, I would choose it ahead of rivals Air New Zealand Limited (ASX: AIZ) and Virgin Australia Holdings Ltd (ASX: VAH). I feel Qantas is the superior option in the industry. Especially with its fuel hedging, cost cutting, and successful capacity management.
