The Qantas Airways Ltd (ASX: QAN) stock price had an excellent 2024, rising by almost 70%.
With such a strong valuation heading into 2025, the market seems to expect quite a lot from the airline in FY25 and the foreseeable future.
Travel demand has been strong since COVID and border restrictions started being lifted. Indeed, many have been surprised by how consistent demand for travel has been over the last few years.
Let's take a look at what one broker thinks of the current situation.
Broker thoughts on Qantas stock
UBS currently has a neutral rating on the airline rather than a buy due to the huge increase in its valuation over the past 12 months.
The broker does have growing confidence in the sustainability of Qantas' post-COVID earnings and justifies the re-rating of the price/earnings (P/E) ratio.
However, at $9.34, the Qantas stock price is now trading above UBS' price target of $9. A price target suggests the level at which a broker thinks the share price will be 12 months after the investment call. UBS said with the P/E ratio now at a "mid-cycle" level, the upside is "less compelling".
UBS is tracking airfare data and it has seen the domestic and international series both turning positive for the Qantas and Jetstar brands. If airfare strength is sustained at these levels for several months, it's possible Qantas' earnings could outperform what UBS and the broader market are expecting.
Commenting on the airline's expenditure, UBS said:
On costs, we believe previously held market concerns are neutralising following the cleansing information in [the] FY24 result plus improving on-time performance, albeit with more work to be done.
Capital expenditure requirements reduce fair valuation
The broker said that based on long-term history, it values Qantas's mid-cycle P/E ratio at 9.5x for several years to come. UBS then suggested that the airline's required expenditure on new planes lowers the current value of its shares.
UBS wrote:
Right now, however, we believe the appropriate multiple should be adjusted lower by 10-15% due to where the airline is in its capex cycle.
The broker suggested the Qantas stock price looks expensive compared to European airlines but cheap compared to US carriers. However, when considering the short-haul and long-haul mix of flights, UBS thinks the relative valuation is "fair".
In FY25, UBS expects Qantas to generate $23.5 billion of revenue, $2.58 billion of operating profit (EBIT), $1.64 billion of net profit and pay a dividend per share of 20 cents.
Time will tell how accurate UBS' forecasts prove to be.
