The stars appear to be aligning for Qantas once again.
We expect FY earnings to be up in the order of 20-25%, with the company poised to make a record profit, underpinned by low oil prices.
On that front, whilst oil prices have been stronger of late, Saudi Arabia recently made deep reductions to the prices it charges for its oil, hard on the heels of cuts last month by rival producers in the Gulf.
With U.S. production still increasing despite lower oil prices, members of the Organization of the Petroleum Exporting Countries are battling to keep their share of the last growing markets in Asia.
The move comes as Iran, Iraq and other countries in the Middle East made deeper cuts in their official prices than Saudi Arabia last month.
Saudi Arabia has vowed to keep pumping at high levels as it hopes lower oil prices will stimulate Asian demand and hit rival production in the U.S. that is expensive to produce.
More recently, OPEC’s monthly report said the group pumped 31.57 million barrels per day in September, up 110,000 from August, and almost 2 million more than its demand prediction for this year. This is a trend that is likely to continue.
These factors should keep oil prices lower for longer.
Back to Qantas, with no tax payable, low capex requirements and surplus liquidity, we believe that it is possible the company could hand back $2.4bn to shareholders in FY16.
On the technical front, QAN is showing us everything we could want to see.
We have a solid bullish structure in place, with the price action well supported by the 125-period EMA.
Momentum is strong and the stock is not yet in overbought territory, suggesting prices could press higher.
With $3.50 being tested and respected as support recently, we see potential upside outweighing downside and would happily be buyers at current levels (around $.375), targeting a move as high as $4.50.