3 big reasons to buy Qantas shares now

Goldman Sachs thinks big returns could await buyers of this stock.

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Qantas Airways Limited (ASX: QAN) shares could be a great option for investors that are looking for outsized returns.

That's the view of analysts at Goldman Sachs, which feel that the airline operator's shares are being severely undervalued by the market.

In light of this, the broker feels that anyone buying today could enjoy a big return on their investment over the next 12 months.

What is the broker saying about Qantas shares?

According to a recent note, the broker has put a buy rating and $8.05 price target on its shares.

Based on the current Qantas share price of $6.16, this implies potential upside of just over 30% for investors between now and this time next year.

To put that into context, a $20,000 investment would become $26,000 if Goldman Sachs is on the money with its recommendation.

Three big reasons to buy

There are three big reasons why Goldman thinks Qantas shares are in the buy zone right now. The first is that its improved earnings capacity is not being reflected in its valuation. It said:

We expect QAN's earnings capacity to sustainably improve relative to pre-COVID, which is not reflected in Qantas' current valuation.

In addition, the broker feels that this unwarranted discount will disappear in time once the company demonstrates that its earnings are sustainable at these levels. It adds:

As noted previously, our FY24/25 PBT remains 51%/61% ahead of pre-COVID level despite relatively conservative/cautious RASK forecast settings. We forecast QAN's FY24e/25e EPS to be at 49%/68% ahead of FY19. Despite this, QAN's market cap is 4% below and EV is 7% below pre-covid levels. We believe that QAN's continued demonstration of earnings sustainability will be the key driver of earnings revision hence share price going forward.

Another reason to buy Qantas shares is their valuation in comparison to peers. It highlights that the Flying Kangaroo trades at almost double the discount that they have traded at in recent times. It feels this discount is excessive. The broker adds:

QAN is trading at PE discount of 29% vs US+regional peers vs historical 5Y average discount of 14%. Given QAN's more conservative revenue profile, recent operational performance improvements, which implies that further investment in customer service would not be required, we believe that the discount is excessive.

All in all, Goldman appears to believe that this makes Qantas a great option for investors that are looking for some new additions to their portfolios right now.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. 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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