Qantas Airways Ltd (ASX: QAN) shares have delivered very impressive returns, rising by close to 90% in the last year alone. Since the COVID-impacted year of 2020, Qantas shares have increased more than 220%, as the chart below shows.
A key question now is to ask whether the airline has reached 'fair value', or perhaps even exceeded that.
Airlines traditionally trade on a low price/earnings (P/E) ratio, partly because of the large balance sheets and intensive capital requirements.
But, the significant rise of Qantas' share price (and valuation) has meant the earnings multiple has changed. That's one of the things investors need to factor in.
Let's take a look at the negatives and positives of investing in the airline.
Negatives
When an ASX share rises that strongly, the valuation itself can become a risk if it has run too hard. I'll utilise UBS' projections to work out what the current P/E ratio is for the business.
The broker UBS is forecasting that Qantas could generate $1.68 billion of net profit in FY25 and $1.10 of earnings per share (EPS). That means at the current Qantas share price, it's valued at around 10x FY25's earnings.
But, according to UBS, it had a P/E ratio of 6.2 in FY23 and 6.4 in FY24, so it's trading at a much higher multiple than recent times.
Another element to keep in mind is that Qantas is embarking on fleet renewal, which is capital-intensive – planes are not cheap! This means that capital can't be used for shareholder returns, whether that's dividends or share buybacks.
UBS is expecting the company's net debt on the balance sheet to steadily increase over the next few financial years. FY25 could see net debt reach $5.9 billion, and then $6.4 billion in FY26, $6.8 billion in FY27, $6.9 billion in FY28 and $7.2 billion in FY29.
Positives about Qantas shares
Turning to positives, on the fleet renewal point, Qantas recently announced it's exiting its Jetstar Asia operations, as of 31 July. This will enable it to repatriate 13 midlife A320s, which Qantas estimates have a market value of $500 million.
The next positive I want to note is that Qantas' earnings are pleasingly consistent. This should mean it's worthy of a higher P/E ratio than FY23, despite the post-COVID travel boom at that stage. Travel demand remains solid for the airline, helping earnings.
Another pillar of growth for the business is its Qantas loyalty division. It made $255 million of underlying operating profit (EBIT) in the first half of FY25 and the airline is expecting to report around 10% growth of underlying EBIT for the full-year. The airline is targeting between $800 million to $1 billion of underlying EBIT by FY30 from this segment.
While projections aren't guarantees of what will happen, UBS is forecasting Qantas' net profit could increase every year between FY25 to FY29. FY25 could see net profit of $1.68 billion, followed by $1.82 billion in FY26, $1.93 billion in FY27, $2.08 billion in FY28 and $2.2 billion in FY29.
While I'm not expecting Qantas shares to trade on a tech-like P/E ratio, consistently rising profit can help justify a higher valuation.
I'm not expecting Qantas shares to rise much further in the short-term, though lower fuel costs (as we're currently seeing) could help the airline's profitability. I wouldn't choose to buy it today, but I'd be very happy if I were a shareholder, and I wouldn't want to sell with further profit growth expected.
