Why does a stock that’s run so hard in a year still attract seven from eight Buy ratings from major brokers?<\/p>\n
– Stable duopoly in Australia By Greg Peel<\/p>\n Qantas Airways ((QAN)) has come a long way since the infamous grounding of 2011. When the stock hit its nadir of close to $1.00 in early 2014, questions were being raised as to whether the airline could survive and whether it could be sold, which would require a change to federal legislation.<\/p>\n The stock is now trading at $5.75. That’s a 418% rally in three and a half years and a 115% rally since the previous low set on a pullback one year ago. Supporting the rally has been the big fall in oil prices over the period, and a move within the airline industry to cease mutually destructive competition and rationalise capacity. On such an exponential surge, one would expect brokers would be calling the move overextended.<\/p>\n Of the eight major brokers on the FNArena database covering Qantas, none has a Sell (or equivalent) rating. One has Hold. The rest retain Buy ratings.<\/p>\n Underpinning ongoing positive views is the fact, noted by brokers, that despite the Lazarus performance Qantas is still trading at a discount to global peers. Early last month Citi suggested there will likely be “material upgrades” to consensus earnings forecasts from FY18 onwards.<\/p>\n If the Australian airline industry has learned one thing over the past decades, it is that the domestic market cannot handle a third airline. So many have tried and failed.<\/p>\n After a period of rationalisation, Qantas’ domestic service now operates in a stable duopoly with Virgin, Credit Suisse suggests. Qantas’ loyalty program arguably enjoys better-than-duopoly status. Together these make up around 70% of stock valuation.<\/p>\n While popular with Dustin Hoffman, Qantas’ international service only accounts for 15% of value. This balance means Qantas enjoys more stable earnings than its international peers, Credit Suisse notes.<\/p>\n Over the past 20 or so years, Qantas has only suffered two years of pre-tax losses. US and European airlines have suffered many years of losses. Domestically, Qantas is able to enjoy a ticket price yield of around 15% above Virgin, at a unit cost that is only around 5% above Virgin, Credit Suisse points out. The broker believes Virgin’s focus from here will be on attempting to improve its profitability rather than trying to gain market share.<\/p>\n This means duopoly conditions should remain stable for some time, Credit Suisse suggests. A stabilised domestic duopoly deserves a premium in the broker’s view.<\/p>\n Credit Suisse already had a Buy (Outperform) rating on Qantas but last week lifted its target price to $6.75 from $5.00 to apply said premium to valuation.<\/p>\n This is still not the high marker among FNArena database targets. Citi has set $7.09. The consensus target of eight brokers is $5.54, suggesting downside, but then neither Deutsche Bank ($4.10) nor Morgan Stanley ($4.30) have updated since the February result season.<\/p>\n The only real sceptic is Ord Minnett, who as late as May retained a Hold rating with a $4.15 target.<\/p>\n
\n– Stronger margins
\n– Discount to international peers<\/strong>
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