Why one fund manager thinks Qantas shares are cheap and 'incredibly underappreciated'

A fundie thinks Qantas stock can fly higher.

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Qantas Airways Limited (ASX: QAN) shares could be an opportunity that may fly soon enough, according to one fund manager.

The Qantas share price has lost altitude over the last year, as we can see on the chart below.

Some investors think this decline has opened up a chance to buy Australia's leading airline at a discounted price. Let's look at why one fundie has boarded Qantas stock.

Strong demand continues

The fund manager L1 recently noted that Qantas continued to benefit from domestic demand remaining "robust" despite higher airfares.

The investment team believe Qantas is "extremely well placed" to compete strongly after its $1 billion cost-out program, the "exceptional" loyalty program and its leading domestic market position.

The strong demand can continue to be seen in the financials.

In its FY24 first-half result, Qantas reported underlying profit before tax of $1.25 billion and statutory net profit after tax (NPAT) of $869 million. With that large profit generation, the company announced an additional on-market share buyback of up to $400 million. The company reported a "significant improvement in customer satisfaction" though there was "more work to do".

Profit generation is an important factor for Qantas shares.

Positive upcoming developments

L1 is expecting Qantas to outline its plans in April to improve its loyalty offer to enable easier access for frequent flyer members to use their points.

The investment team believes new CEO Vanessa Hudson is rapidly and methodically addressing customer "pain points". These changes will "improve sentiment from both customers and potential investors", according to the fund manager.

Another reason L1 thinks Qantas is positioned well for the next few years is that it will have Australia's "best loyalty business", which could see a doubling of earnings over the next five to seven years. It also has a number of new, more fuel-efficient aircraft.

'Project Sunrise', which will enable direct flights from Melbourne and Sydney to London and New York, is also expected to be positive for the airline.

Finally, Qantas shares could benefit from having sufficient balance sheet capacity to continue its share buyback and then recommence paying fully franked dividends next year.

Are Qantas shares trading at a cheap valuation?

L1 has estimated that Qantas shares are valued at a price/earnings (P/E) ratio of just 6x. That means the Qantas share price trades at a multiple of six times its earnings.

The fund manager thinks this is a very cheap valuation considering Qantas's dominant industry position, exposure to the structural tailwinds of Asian inbound tourism to Australia, and a high-growth, light-light loyalty division that remains "incredibly underappreciated by the market".

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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