Qantas Airways Ltd (ASX: QAN) shares have fallen more than 21% over the past year, and at least one broker thinks that is an opportunity.
Morgan Stanley has a buy rating with a 12-month price target of $12.80.
Qantas shares closed Tuesday at $9.28, which implies capital growth of around 38%.
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Why Morgan Stanley likes Qantas shares
Qantas trades on a price-to-earnings ratio of 11 with a 3.87% fully franked dividend yield.
That is one of the cheaper multiples in the S&P/ASX 200 (ASX: XJO).
Qantas' operating momentum is also better than the share price suggests.
Management expects total unit revenue across domestic and international to rise between 8% and 10% in the first half of FY27.
Qantas Loyalty earnings are forecast to grow 5% to 7%, and the division already lifted underlying EBIT 12% in FY26.
The first Project Sunrise A350-1000ULR arrives in April, with the first non-stop Sydney to London service launching in October.
What Qantas shares earned in FY26
The full-year result was a step backwards: Underlying profit before tax fell $330 million to $2.06 billion.
Statutory profit after tax declined $316 million to $1.29 billion.
Underlying earnings per share dropped 14 cents to 96 cents.
Almost all of that decline has a single cause.
The conflict in the Middle East produced a net impact of $420 million on the FY26 result, driven by record fuel prices and route disruption.
Strip that out and the underlying business actually grew.
What's more, shareholders were still paid. The final fully franked dividend was 19.8 cents per share, taking total FY26 dividends to $600 million.
Net capital expenditure rose 3% to $4.0 billion and 17 new aircraft were delivered.
Net debt increased to $6.2 billion, which remains inside the target range, and a planned $150 million buyback was cancelled.
Chief executive Vanessa Hudson was optimistic about the year:
This has been another year of progress, with customer satisfaction at its highest in a decade and world-leading operational performance, even as the aviation industry faced record high fuel costs and disruption from the conflict in the Middle East. We came through it with a strong result, which is what allows us to continue investing in the largest fleet renewal in our history and deliver more for our customers, people and shareholders.
What Qantas shares could pay from here
Reassuringly, the dividend outlook is steadier than the earnings outlook.
Commsec projections have the airline holding its annual dividend at 39.6 cents in FY27.
That would be a 4.25% yield, or roughly 6% grossed up with franking credits.
The same projections point to 43.1 cents in FY28 and 49.6 cents in FY29.
For an airline, that is an unusually respectable income profile.
The risk facing Qantas
Oil is a key input whose volatility continues to impact Qantas.
Brent crude settled at US$97.31 a barrel on Monday after another escalation between the United States and Iran near the Strait of Hormuz.
Every dollar on the oil price flows almost directly into the airline's largest controllable cost.
Weakening households are the second risk.
Consumer sentiment fell 5.2% in September to 84.4, and discretionary travel is the sort of spending that gets deferred.
Qantas says international demand remains strong, helped by customers redirecting away from the Middle East, but that is a fragile advantage.
Foolish takeaway
Morgan Stanley's target implies the market is treating thr fuel shock as permanent.
That may prove too pessimistic, because the fleet renewal, the Loyalty division and the unit revenue guidance all point in a more positive direction.
At 11 times earnings with a 6% grossed-up yield in prospect, Qantas shares are at least being priced for the risk, leaving potentially plenty of upside on the table.
