Is Qantas A Good Investment

Why would an investor choose to buy shares in Qantas? Because of its worldwide reputation for safety, professionalism and service? Because of its proud history as one of the world’s oldest airlines? Or simply to have a stake in the “flying kangaroo”, unquestionably Australia’s most internationally recognisable brand? Well, there are probably thousands of small investors – the so called “mums and dads” who will buy themselves a few thousand shares in Qantas for exactly these kinds of reasons. Emotional, irrational reasons. But these investors are likely to account for no more than 20% of the total $2 billion which the Government hopes to raise through the float of Qantas. The investors who will really count will be the institutions who buy their shares not by the thousand, but by the million. The institutions will waste no emotions on analysing such a float. Instead, small armies of accountants and analysts will run thousands of spreadsheet analyses, and do millions of calculations to assess the pros and cons of the shares on offer. To decide whether Qantas is a good investment buy, we need to free ourselves of the emotional considerations and look at the problem like an analyst. We need to gather as much information as we can, in order to form an opinion of the financial health of the company and its prospects for the future. So where to start? Most analysts will start at the general, broader considerations, before working their way down to the nitty gritty details specific to the particular company. Looking at past history may be useful but only insofar as it provides clues as to how the company might perform in the future. A good place to start is to look at prospects for the world economy in general, followed by that of the region and the country. As the analysis becomes more specific, one must look at prospects for the company’s sector. Finally, we get down to the company itself. Is the company expected to be in good shape? What are its expected strategies, and how profitable are these expected to be? How well regarded is its management team? How will they respond to competition and what impact will this have on profits? When analysing the company, the only factor an investor is interested in is what earnings the company is likely to generate. And when we talk about earnings, we are talking about sustainable, cash earnings. Not short term earnings achieved by selling off large assets such as aeroplanes (as Qantas itself had been doing over recent years). Having set out the general plan, let’s get on with the analysis:

The World

After the last few years, during which much of the industrialised world has been experiencing little or no or negative growth, there is now emerging a general return to positive, albeit low, rates of growth. Major countries such as the USA are now managing to maintain annualised growth rates of around two to four percent, and this is likely to continue. This growth appears sustainable (if not at quite the same level) and is aided by low real interest rates and low inflation. The overall outlook is likely to be positive for the remainder of the decade. Despite some notable blackspots, the Cold War is over, peace is breaking out throughout much of the world, and many of the former “Eastern bloc” countries are beginning to develop and expand their economies. Most encouraging is the general world trend toward freer trade, the lowering of tariffs and other barriers to imports- most notably the GATT agreement. There are also regional arrangements being developed under acronyms such as NAFTA and APEC. Provided that these do not develop into opposing trading blocs, they offer the potential for increased prosperity for all their members.

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