Is the Qantas share price too low to ignore?

The Qantas Airways Limited (ASX: QAN) share price has seen plenty of volatility over the past five years, as the chart below shows. With COVID-19's effects in the rearview mirror, some investors may wonder whether the ASX travel share is a bargain.

Airlines normally trade on a much lower valuation than other sectors, as measured by the price-to-earnings (P/E) ratio. If the earnings of a low P/E stock can grow, then the business could be an undervalued opportunity.

Now that the travel industry has returned to a new normal let's examine where its earnings may go and whether, in the eyes of one expert, it's an opportunity.

Stronger case for the airline

A lot has happened in the last five to ten years, but UBS thinks Qantas is in a better position than before COVID-19 for a few different reasons.

First, the domestic market is "less competitive".

Second, Qantas' loyalty division is contributing more earnings before interest and tax (EBIT).

Third, gearing (debt on the balance sheet) is lower.

Fourth, Qantas is ramping up its fleet renewal, whereas in the last cycle, it spent less on capital expenditures.

The first three UBS arguments suggest an improvement in earnings stability. The fourth point is "double-edged" — profit before tax growth may be damped by higher depreciation and financing (with higher interest rates), but the investment in the air fleet "improves the competitive resilience of the cost base and customer experience."

Is the Qantas share price a buy?

UBS noted that earnings hardly changed in the three years before COVID-19, with forward underlying profit before tax steady at around $1.4 billion. Meanwhile, the enterprise valuation to earnings before interest, tax, depreciation, and amortisation (EBITDA) ratio multiple doubled from 2.5x to 5x, and the Qantas share price lifted by 143%.

The broker thinks that if Qantas' earnings can remain stable during this cycle, then there could be a positive re-rating for Qantas shares again.

What catalyst would cause this?

UBS suggests it doesn't need a catalyst, just as long as no negative catalysts could hold it back. For example, Qantas has "strong exposure to consumer and business travel demand". However, UBS believes investors are already compensated for that with a single-digit earnings multiple.

According to the UBS estimates, the Qantas share price is valued at 6.75 times FY24's estimated earnings. It's also valued at 6 times FY27's estimated earnings and 5.5 times FY28's estimated earnings.

UBS rates it as a buy, with a price target of $7.50. That implies a rise of around 20% in the next 12 months, though that return is not guaranteed.