Qantas Airways Limited (ASX: QAN) shares have been flat over the last six months, up just 2%, but some analysts are now saying it could be a buy. What do the numbers say?
Qantas is Australia’s leading airline. It was founded in the Queensland outback in 1920, the Qantas name was originally Queensland and Northern Territory Aerial Services. The company operates two main airlines – Qantas and Jetstar – and subsidiary businesses including other airlines, businesses in specialist markets such as Q Catering, Qantas Freight Enterprises and the popular Qantas Frequent Flyer program. It employs some 30,000 people with around 93 per cent of them based within Australia.
Qantas shares are up just 2% over the last six months and down 3.7% over a one-year period. More recently, the share price has fallen following their half-year report and the announcement that the CEO resigned and will finish tomorrow, 24th April.
The Qantas share price has also struggled following recent reports of lower air traffic in March.
Despite the challenges they are facing, some analysts believe Qantas shares are a buy right now and have price targets of around $6.50. That compares to the current price of around $5.70.
While profit before tax decreased in Qantas’ recent half-year report, revenue was 5% higher. Increasing fuel costs were the reason that Qantas did not achieve a greater profit. Although fuel costs can’t be ignored, it shows that Qantas is able to generate higher revenue than it was a year ago.
Qantas also reported a respectable return on invested capital (ROIC) of 19.3% and all segments delivered an ROIC greater than the weighted average cost of capital (WACC). In other words, they can use their capital efficiently to generate positive returns.
The other positive is the dividend yield of 3.86%. Although it looks negligible compared to the dividend yields of companies like Naos Emerging Opportunities Company Ltd (ASX: NCC), it is still a reliable income stream that could increase each year.
Would I Buy?
I’m not sure about the $6.50 valuation pitched by analysts, but I can certainly see some positives in Qantas, particularly the high ROIC. Besides that, there are no other companies in Australia that can compete with Qantas; they dominate the Australian airways industry.
However, there are certainly better options for dividend income and I think there are companies that will generate higher capital growth. For some ASX examples, check out the free report below.
Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.