Qantas Airways Ltd (ASX: QAN) shares have returned to their former glory and have rallied more than 59% this year.
Shares in the flying kangaroo now trade at $8.53 apiece, having rallied nearly 19% in the past month alone, buoyed by earnings and a roaring stock market.
They are now firmly above the clouds of the ASX, gliding with the winds of investors buying up shares in droves.
L1 Capital's recent assessment is optimistic. It notes the airline's strong finances, loyalty program growth, and fleet upgrades as key factors that position Qantas well for the medium term.
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Qantas shares above the clouds
Qantas shares were on many fund managers' radars earlier this year, as they had not fully recovered from the pandemic.
A series of internal and external scandals followed. These ranged from flight cancellations, termination of ground staff, and actions taken by former CEO Allan Joyce. All of which were deemed to be in the wrong by the court and shareholders, respectively.
In its latest quarterly update, L1 Capital highlighted Qantas' strong FY24 performance. The firm holds Qantas in its long/short fund, the L1 Long Short Fund Limited (ASX: LSF).
It posted a 2.1% return in the September quarter, clipping a 27% return on its position in Qantas shares alone. The fund manager was positive on Qantas' earnings numbers.
Qantas delivered a strong FY24 result that was broadly in line with expectations, underpinned by positive trading across Qantas and Jetstar. Strong cash flow in the half highlighted the robust financial position of Qantas and helped underpin a new $400m share buyback announcement and guidance to reinstate fully franked dividends from 1H25.
Assuming a modest 30% payout ratio, Qantas would be trading on a 4.1% fully franked dividend yield. Domestic demand remains robust, and the recent fall in the jet fuel price provides an additional boost to earnings.
L1 Capital sees Qantas' loyalty program as a standout asset. It expects this to double earnings over the next five to seven years. This capital-light division, with its solid grip on Australia's loyalty market, could be a differentiator moving forward.
Portfolio managers at the L1 Long/Short fund are looking at Qantas' future, with plenty of potential catalysts on the horizon. This puts it in a good spot in the mid-term, the fund says.
Pleasingly, efforts by Qantas under new CEO Vanessa Hudson to address customer 'pain points' appear to be bearing fruit, with improved on time performance, NPS (Net Promoter Score, which measures customer satisfaction) and growth in frequent flyer participation, all indicating improving brand health for Qantas and Jetstar.
We believe Qantas remains very well placed over the medium term, given it has Australia's best loyalty business (which is expected to double earnings over the next 5-7 years) and a raft of brand new, more fuel-efficient aircraft to be delivered, along with Project Sunrise, which will enable direct flights from Melbourne/Sydney to London and New York from 2026.
Are Qantas shares priced to buy?
Aside from the underlying fundamental factors, L1 Capital is bullish on Qantas due to its valuations. The fund notes Qantas' low relative valuation, trading at less than 10 times earnings at the time of writing.
Qantas trades on a FY25 [price-to-earnings ratio] P/E of only 7.5x, despite a leading industry position, structural growth in travel demand and a high growth, capital-light loyalty division, which remains incredibly under-appreciated by the market.
But not all analysts are bullish on the stock. Peak Asset Management's Niv Dagan has advised locking in profits, noting the stock's year-to-date gains and the sector's exposure to geopolitical risks. According to The Bull:
Investors have flocked back to the airline during 2024, driving up shares from $5.35 on January 2 to trade at $8.28 on November 7. The company recently announced that trading in the first half of fiscal year 2025 was in line with expectations amid stable demand for Qantas and Jetstar.
However, geopolitical events can create uncertainty in a fiercely competitive and volatile sector that potentially may impact margins moving forward. Given the share price rise, investors may want to consider locking in some profits.
While these two investors are at odds about the company's next direction, it's up to Qantas to execute on its vision.
Foolish takeout
Fundies are bullish on Qantas shares, but not all are as optimistic. L1 Capital says the airline appears well-positioned for medium-term growth.
Others say the stock has overextended following its rise, and the time might have come to size down.
In the last 12 months, Qantas shares are up more than 62%.
