Up 25% in a year, is it time to cash in Qantas shares?

The Qantas Airways Limited (ASX: QAN) share price has been one of the better-performing, non-resource S&P/ASX 200 Index (ASX: XJO) shares over the past year.

But, after the last 12 months, is it time to exit Qantas as an investment?

Qantas shares have done well amid a recovery for travel, it has increased its profit guidance and improved its expectations for net debt.

The last Qantas market update was released near the end of November 2022. It showed that underlying profit before tax was expected to be $1.35 billion to $1.45 billion for the first half of FY23, while net debt is expected to fall between $2.3 billion to $2.5 billion.

While consumers “continue to put a high priority on travel ahead of other spending categories”, fuel costs were “significantly elevated with FY19 and are expected to reach approximately $5 billion for FY23”. That’s despite international capacity being around 30% below pre-COVID levels.

Is this the best it gets for the Qantas share price?

One expert thinks that the airline could fly even higher.

Wilson Advisory has held Qantas shares in its ‘focus portfolio’ for exposure to the travel recovery theme. It “still believes Qantas presents a well-priced investment opportunity due to its current discounted valuation relative to US peers, while earnings still have the potential to surprise to the upside”.

According to Wilson, Qantas shares are forecast to trade at an enterprise value to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of 3.2x for the 2024 calendar year, while the average of American Airlines, Delta Air Lines, United Airlines and Southwest Airlines is 4.4x.

Wilson said this discount seemed “unjustified”, with Qantas and the Australian air travel industry going through “structural change” since the pandemic. There was “reduced competition”, and a “more rational market” with the potential initial public offering (IPO) of Virgin. Qantas has also reduced its costs by around $1 billion since the start of the pandemic, increasing its profitability.

Wilson also noted that Qantas earnings were forecast to grow in FY24 by 2.6%, with that estimate looking “too conservative”, according to the team. It thinks pent-up travel demand will continue to help prices and passenger numbers. Wilson also pointed out that international travel numbers are yet to fully recover. The airline could also announce further share buybacks.

How far could the airline rise?

Wilson suggested that if Qantas’ (analyst consensus) forecast EBITDA for FY24 was put on a multiple of 4x, compared to the FY24 US peer average of 4.4x, this would place the Qantas share price at $8.57. That’s a potential upside of more than 30%.

But, if Qantas were conservatively valued at 3.5x the consensus FY24 EBITDA – below the pre-COVID multiple of 3.7x – this would suggest a value of $7.34. This could be a possible rise of around 15% for Qantas shares.

Wilson also suggested that forecast earnings for FY23 to FY25 could be too conservative, and that upgrades were plausible for the next 12 months. This could mean even further upside.

The post Up 25% in a year, is it time to cash in Qantas shares? appeared first on The Motley Fool Australia.

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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.

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