Should I buy the dip on Qantas shares?

Man sitting in a plane seat works on his laptop.

Man sitting in a plane seat works on his laptop.

The Qantas Airways Limited (ASX: QAN) share price suffered a 7% sell-off in reaction to the airline’s FY23 half-year result. Is this a good time to buy shares?

While the airline has seen a rough initial response to its numbers, it’s important to remember that it has risen substantially over the last six months.

Investors can get more and more optimistic about the business, but then become too positive in the short term.

That may have happened here, even though Qantas revealed a very strong set of numbers considering what has happened over the last three years.

Earnings recap

The airline revealed that it achieved underlying profit before tax of $1.43 billion and statutory net profit after tax (NPAT) of $1 billion. In statutory earnings per share (EPS) terms, the amount made was 53.9 cents.

After such a strong recovery of earnings, Qantas saw its net debt reduce to $2.4 billion.

With the balance sheet in such rapidly-improving shape, the company decided to launch a $500 million share buyback.

It outlined a “material improvement” in operational performance and customer satisfaction, while also pointing to ongoing investment in lounges, technology and customer experience.

Qantas also said that it has an updated fleet plan, including turning nine purchase right options into firm orders for Airbus A220s.

How is the outlook shaping up?

The Qantas boss Alan Joyce said:

Fares have risen because of higher fuel costs, but also because supply chain and resourcing issues meant capacity hasn’t kept up with demand. Now those challenges are starting to unwind, we can add more capacity and that will put downward pressure on fares.

In terms of overheads, we expect the costs we’re carrying from the extra operational buffer will start unwinding from this half and into next financial year.

Returning to profit means we can get back to reinvesting for our customers, which is clear from the network, fleet and lounge announcements we’ve made, and from the Project Sunrise cabins we’re previewing. Importantly for our investors, this also sets us up to deliver long term shareholder value.

That investment includes $100 million spent on expanding domestic and international lounges over three years.

The average fare price is around 20% higher than in 2021. The Qantas share price is benefiting from the strength of the revenue that it’s generating from each flight.

But, the business is expecting travel demand to remain strong over the current financial year and into FY24.

Qantas’ domestic capacity is expected to increase from 94% to 103% through the second half of FY23. Meanwhile, international capacity is expected to increase from 60% to 81% through the second half of FY23.

It stated in its outlook guidance that fares are expected to moderate as capacity increases, but will remain “significantly above FY19 levels.” The fuel cost for FY23 is “expected to be $4.8 billion” with hedging in place.

My views on the Qantas share price

It was unfortunate for shareholders that the market didn’t like what the airline reported.

However, I thought there were a number of positives including a return to making major profit, net debt reduction and launching another share buyback, which theoretically improves the value of each remaining share.

With capacity still returning, I think that’s a good sign for Qantas’ earnings in the second half of FY23 and at least for the start of FY24.

I don’t think Qantas will deliver massive outperformance from here in the shorter term, but I like what the airline is doing and I think that it can keep making good profits now that the pandemic effects are wearing off.

With the bigger profits, Qantas can keep paying shareholder returns, like share buybacks and possibly dividends in the future. I think Qantas is a long-term buy.

The post Should I buy the dip on Qantas shares? appeared first on The Motley Fool Australia.

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More reading

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

from The Motley Fool Australia

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