Qantas Limited (ASX:QAN) shares are a “classic value trap” with higher fuel prices likely to be a “huge drag on its earnings” according to a leading fund manager.
Writing in its September 2018 performance update, the Paragon Australian Long Short Fund says global oil demand continues to rise, exceeding global supply. In the fund’s view, this will see global inventories falling further, which will only drive oil prices higher.
Rising oil prices is a headwind for Qantas. The fund sold short (bet against) Qantas shares in August, along with Caltex Australia (ASX:CTX) shares.
The fund said that whilst Qantas has gone from market-dog to market-darling, high Australian dollar oil prices are a huge drag on its earnings. It does not expect the $500 million additional fuel costs Qantas will incur will be able to be offset by price rises to airline tickets.
Qantas shares look cheap, trading on a forward price to earnings ratio (P/E) of around 9 times earnings, but Paragon says this is a “classic value trap in our view.”
This view is in contrast to the views of the Firetrail Australian High Conviction Fund, which in May said Qantas shares show “compelling upside.”
Paragon said 12 month forward earnings for Qantas could be 30 per cent lower, implying an adjusted P/E of ~13 times, which it says is high in a rising oil price environment.
Global airlines are also starting to de-rate and Paragon views that Qantas’ risks are weighted to the downside.