Qantas Airways Limited (ASX: QAN) shares have rallied strongly since the start of March.
During this time, the airline operator's shares are up approximately 15%.
Whereas over the same period, the ASX 200 index has traded broadly flat.
But despite this outperformance, analysts at Goldman Sachs believe that Qantas shares are undervalued at current levels.
What is the broker saying about Qantas shares?
According to a note out of Goldman Sachs this morning, its analysts have reiterated their buy rating and $8.05 price target on the Flying Kangaroo's shares.
Based on the current Qantas share price of $5.91, this implies a potential upside of 36% over the next 12 months.
To put that into context, a $10,000 investment would turn into approximately $13,600 if Goldman is on the money with its recommendation.
Why is Goldman bullish?
The note reveals that the broker believes the market is undervaluing Qantas' structurally stronger earnings.
It thinks this has been driven partly by a trade-off between investment and capital returns. Goldman sees this as "a buying opportunity" for investors. It explains:
We expect QAN's earnings capacity to structurally improve (due A$1b+ cost out program), with FY24e PBT 51% ahead of pre-COVID levels. In addition, current ongoing customer investment is gaining traction (improved operating performance), alleviating concerns and key downside risk. The discounted valuation versus peers and its own history implies that the market is pricing in a trade off between investment (fleet and customer) and capital returns (dividends & buybacks), which we view as a buying opportunity.
Dividends to return
Another reason to be positive on Qantas shares is the prospect of its dividends returning soon.
Goldman acknowledges that Qantas has some big spending to do on its fleet in the coming years. However, it believes that the company's balance sheet will remain strong and allow the company to resume paying dividends and return capital.
Across FY25-27, we forecast A$11.3bn of capex (cumulative), in-line with consensus estimate. Despite this spend and our forecast distributions, we estimate that QAN's ND:EBITDA will remain below within its target range across the forecast period. In our view, this should allow for continued capital returns to shareholders alongside fleet renewal. Over the three-year horizon (FY25-27e), we forecast total buy-backs and dividend payments of A$1.6bn. This includes A$1.2bn of dividends vs consensus of A$1.1bn.
The broker is forecasting dividends of 30 cents per share in both FY 2025 and FY 2026. Based on its current share price, this will mean above-average dividend yields of 5.1% for both years.
