Yesterday, one of the best performing stocks this year, Qantas Airways [ASX:QAN], jumped 3% to $6.12 per share. Investment bank Goldman Sachs upgraded their rating for the stock.
According to The Australian Financial Review (AFR), Goldman Sachs lifted their outlook on the airline as Qantas did the same, prompting investors to buy.
‘Qantas Group has forecast full-year profits slightly ahead of analysts’ expectations as stronger domestic sales counter weakness in its international business.
‘The airline expects to report full-year underlying group profit before tax of between $1.35 billion and $1.4 billion. Analysts’ consensus expectations had been a $1.35 billion profit,’ the AFR wrote.
Yesterday’s climb gives Qantas shareholders a year-to-date return of 83.7%.
Source: Google Finance
However, I’m left scratching my head as to why Qantas, which faces fierce competition in a capital-intensive industry, could climb so high.
Sure, the company is expecting earnings to improve into the future, beating expectations by 3.7% at most. But throughout 2017, earnings were far from stellar.
Sky-high expectations fuelling share price growth
In their half-yearly results, revenue, profit and cash from operations didn’t grow at all. Total sales were down 3.3% and profits fell 25.1%.
Fast forward to Qantas’ full-year results and, again, revenue, profit and cash from operations fell compared to 2016 figures.
So why have investors piled into the stock?
Did the price of oil fall dramatically? If you look at the graph below, the price of oil has done little-to-nothing so far in 2017.
Source: Macro Trends
Did their competitors go out of business? No. Airlines like Virgin Australia Holdings Ltd [ASX:VAH] are still around.
So what has caused the stock to appreciate so aggressively? There are three catalysts that come to mind.
The First is Dividends
In FY17, Qantas doubled their dividend from 7 cents to 14 cents per share. Bloomberg forecasts this will continue to rise in FY18, to 18 cents, and in FY19, to 20 cents per share.
Qantas’ Buy-Back Scheme
The second is Qantas’ buy-back scheme. From March 2016 to June 2017, Qantas bought back 143.6 million shares, more than double the amount they repurchased in 2015. The company also announced on 25 August that they would continue to buy back shares worth $373 million.
The third, and maybe most important, is Qantas’ restructure. The airline is reshuffling senior management for the first time in five years. The change also saw more than 4,800 jobs cut and the addition of higher-margin destinations included into their offering.
Goldman Sachs analyst Owen Birrell said:
‘Combined with the ongoing benefits of the “transformation program” and a benign fuel price environment, we expect to see earnings continue to improve.’
We’ll see what happens.
Yet how much further can Qantas realistically climb? Many investors might now be looking to crystallise profits. And if figures don’t live up to expectations, the stock could be in real trouble.
But if you still want to find stocks which could potentially double your money in a matter of months, check out these three small-cap stocks.
Junior Analyst, Money Morning