Why I think the Qantas share price can keep soaring higher

This airline business could keep flying higher in my opinion.

| More on:
A smiling boy holds a toy plane aloft while a girl watches on from a car near an airport runway.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Qantas shares have gone up by 20% over the past six months
  • Strong travel demand and good earnings across the business have led to a recovery in earnings
  • I think Qantas shares can perform well over the next 12 months because of their cheap valuation, a return of tourists, and potential payments to shareholders such as share buybacks and dividends

The Qantas Airways Limited (ASX: QAN) share price has risen more than 20% over the last six months. I think the ASX travel share can keep flying higher as the industry recovers from COVID-19 impacts.

There are few businesses that saw as much of a demand decline as airlines during COVID-19 with the closure of international borders, and even state borders, with lockdowns.

However, there has been a huge amount of pent-up demand that is now coming through, which Qantas is benefiting from.

I think that the ongoing normalisation of domestic and international demand could mean the Qantas share price is undervalued. Its international capacity is still not back to pre-COVID levels.

Demand and earnings drive Qantas share price higher

The FY23 first half showed a lot of promising numbers, with underlying profit before tax of $1.43 billion, statutory profit after tax of $1 billion, the net debt declined $2.4 billion, and the statutory earnings per share (EPS) came in at 53.9 cents.

Qantas explained that the drivers of this result were "consistently strong travel demand, higher yields and cost improvements".

Leisure demand is leading the recovery, according to Qantas, while business travel remained "strong". The company is benefiting from freight earnings being above pre-COVID levels, with a permanent increase of e-commerce domestically leading to a "structural shift" in freight volumes and earnings. That sounds like good news for the Qantas share price.

It also revealed that 'Qantas Loyalty', which includes the Qantas points, saw revenue of $1 billion and underlying earnings before interest and tax (EBIT) of $220 million for the half (a 73% rise). It saw a solid increase in bookings via its holidays offers, a 14% rise in Qantas health insurance customers, growth of travel insurance, and so on.

Every single area of the business seems to be doing well, which bodes well for the future in my opinion.

Why I think it can fly higher

In the second half of FY23, the business is expecting domestic capacity to increase from 94% to 103% of FY19 levels, while international capacity is expected to rise from 60% to 81%.

FY23 second-half fares are expected to remain "significantly above" FY19 levels. The most promising thing for the Qantas share price, in my opinion, is that travel demand is expected to remain strong throughout FY23 and into FY24.

I think a return of Asian, American, and European tourists to Australia will be a very useful support for Qantas earnings.

According to Commsec, the business is expected to generate 99.7 cents of EPS in FY24, which would put the Qantas share price at just 6.5x FY24's estimated earnings. Even a forward price/earnings (p/e) ratio of eight could lead to a rise of more than 20% for Qantas.

Shareholder returns like dividends and share buybacks could also be a boost for the Qantas share price.

In a world of uncertainty amid higher interest rates, I think Qantas is one of the ASX shares that can still do well because of pent-up demand and reopened borders, which can help maintain and grow earnings over the next two financial years.

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.

More on Opinions

A man in his late 60s, retirement age, emerges from the Australian surf carrying a surfboard under his arm and wearing a wetsuit.
Opinions

Here's how much ASX dividend income I'm aiming for in retirement

I’m using passive income stocks as a path to financial independence.

Read more »

A woman's hair is blown back and her face is in shock at this big news.
Bank Shares

$150 a pop: Would I still buy CBA shares as they hit all-time highs?

Here's my take on CBA shares at $150...

Read more »

Smiling couple sitting on a couch with laptops fist pump each other.
Opinions

Why dollar-cost averaging could be the best ASX share investment strategy this decade

I plan to regularly invest using this method in the next few years.

Read more »

A businessman looking at his digital tablet or strategy planning in hotel conference lobby. He is happy at achieving financial goals.
Opinions

Overinvested in Westpac shares? Here are 2 other ASX blue-chips to buy

Diversifying could be a smart choice.

Read more »

A middle-aged couple dance in the street to celebrate their ASX share gains
Retirement

Approaching retirement? Here's why I would put $10,000 into this ASX stock

I think this stock could be the perfect fit for your golden years...

Read more »

A fun depiction of summer Santa Claus -- wearing red swimming trunks and Hawaiian shirt -- sitting in a deck chair on his laptop at the beach.
Opinions

2 ASX stocks on my naughty list this Christmas

Nothing but coal in the stockings of these disappointing companies.

Read more »

a drink poured from a bottle into a glass
Opinions

2 shares I'll be adding to my portfolio – even with the ASX near all-time highs

Even though the markets are near record highs, there is still value to be found.

Read more »

A little Asian girl is so excited by the bubbles coming out of her bubble machine.
Opinions

Worried about a frothy market? 2 ASX shares attractively priced AND 1 dead simple buy

Pricey markets don't require sitting on the sidelines.

Read more »