U.S. investment company Franklin Resources (NYSE: BEN) and its subsidiaries have recently purchased another 3.4 million shares in struggling Qantas (ASX: QAN) since February, taking its stake to 17.48%.
Franklin is the latest in a long line of money managers increasing their stake in struggling ASX companies, following in the footsteps of money manager Blackrock buying (now-defunct) Forge Group and IOOF Holdings (ASX: IFL) buying into Ausenco (ASX: AAX).
Rather than selling out with every other investor, these companies buck the market, increasing their holding when the you know what hits the fan and destroys the share price, hoping to see a turnaround in both face value and underlying earnings. While this can be a sound strategy (indeed, one that all investors should use) if the underlying business is largely unaffected, Qantas, Forge and Ausenco have all seen the underlying earnings of their companies plummet in line with their share prices over the last several years.
In the case of Qantas, it's a big risk to take on a company whose troubles have been plastered all over the media, including here, for the last few years, so what has Franklin seen that Australian investors have missed? For starters, Qantas has a very strong cash position — $2.8 billion at last count, roughly one dollar of cash per share on issue. Investors will note that the current share price is a fraction over a dollar. Not a bad cash position, considering! Of course the company also carries roughly $2 of long-term debt for every share on issue, but we're looking at the positives here.
Second, Qantas has a large fleet, associated infrastructure and subsidiary businesses like Qantas Frequent Flyers. While having a large fleet and excess capacity is part of the problem, 'our fleet is too big' is not a bad problem to have, considering, and provides the airline with plenty of scope to sell or lease aircraft and pay down debt, as well as restructure its routes on the basis of profitability. Qantas is also trading at a fraction of its book value (0.41), which sweetens the deal.
Third is the Qantas brand name and reputation, which shouldn't be underestimated. Its reputation has taken a few hits over its maintenance and staff layoffs unfortunately, but its brand recognition is outstanding and that is something that absolutely can be leveraged, especially with the influx of foreign airlines like Malaysia Airlines (bet it has some empty seats at the moment!), Asiana Airlines and China Airlines.
Foolish takeaway
Investors looking to focus on Qantas' problems will find a raft of articles covering the issues. Ultimately, however, the best stock purchases are those made before the market twigs to the potential of a given company. That is, if Qantas was to become a turnaround story (and I'm not saying that's a foregone conclusion), the best time to buy its shares is now, while it's still being belted by the club of public perception.
As a publicly listed company, Franklin has to earn money for its shareholders, and buying a stake in a company with no prospects is not the way to do that. Therefore, I conclude that Franklin sees value in Qantas that many other investors are missing. Have you been wrong about Qantas too?
