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so is 160k a year a realistic figure for a 5-6 year SO with Qantas ?

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To be fair though, I did put on an upper storey extension last year using my drycleaning allowance.

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The headlines from Dow Jones don’t sound too bad, “Qantas Airways FY Net Profit -4.3% at A$112M” and “1H FY11 Pretax Profit May Be Materially Stronger On Year”.

But just as a newly polished car may look good on the outside, it’s only when you look under the bonnet that you can see what’s really going on.

In the case of Qantas, forget the net profit amount and the forecast for the first half of the 2011 financial year, that’s just the lovely polished finish. If you want to look at the engine you need to look at the company’s cashflow.

And that’s where you can see the engine has almost seized up…

You see, while Qantas reports a $112 million profit, if it wasn’t for proceeds from borrowings of $1.352 billion, Qantas would have had negative cashflow for the year to the tune of $1.265 billion.

In other words, just like the Aussie battler who needs to go to a payday lender in order to cover the cost of a gas or electricity bill, Qantas has had to go to its payday lender and draw down from a debt facility in order to pay its bills.

This is despite supposedly having $3.7 billion of cash in the bank.

But you can see why Qantas went down the road of increasing its borrowings rather than drawing down on cash. Minus the borrowings, Qantas’ cash holdings would have decreased by around a third. Doubtless the analysts wouldn’t have liked that as it would have played havoc with a bunch of cash based ratios.

Much better to go further into debt instead. Just like the rest of the population. Debt is all the rage after all. $1 trillion of household debt can’t be wrong!

The rotten state of the company’s cashflow is evident elsewhere too, such as the decision not to pay a dividend for the third half-year in a row.

Which is hardly surprising considering on a per-share basis Qantas earned just 4.9 cents per share, or earnings of 1.9% of the share price.

When a company’s earnings are that low, and it needs to borrow money in order to be cashflow positive it’s not hard to figure out that the company is in terrible shape.

So much so that it’s not only a stock I wouldn’t buy if you paid me, but it’s a stock that we’d suggest short selling – providing you use appropriate risk management tools to guard against a potential move to the upside.

The way I see it is that airline stocks along with retailers and the banks present the perfect opportunity to short sell the economy heading into a depression – and perhaps the new ASX housing index if that ever gets off the ground. Although given the ASXs history in new product development I wouldn’t hold my breath for that one.

Qantas is clearly suffering from competition and the inability to increase airfares as much as it would like. And if Virgin Blue [ASX: VBA] is successful in its pitch to snaffle a bigger share of the business market then that’ll spell even worse news for Australia’s supposed national carrier.

But look, as you can see from the chart below, Qantas is by no means at a high point:


Terminal velocity for Qantas?



Source: CMC Markets

The best time to short sell this stock may have passed, but quite frankly as an out and out punt – and you know we like a punt – there still looks to be room for a further move to the downside. Perhaps even challenging the low point from early last year.

Broking firm Morgan Stanley recently cut its target price on Qantas to just $3.05, that’s about 20% above the current share price. We’d say that’s overly generous. 20% to the downside is our bet.

Best case for a short seller would of course be for the airline to go bust. And if their cashflow doesn’t improve then that isn’t entirely out of the question.

Although we can’t honestly believe any Australian government would allow Qantas to go broke. Not without finding some way of pouring taxpayer dollars in to prop it up just as it did with the banks.

Even so, a medium term price target of somewhere between $2 and $1.50 makes this a worthwhile punt – but make sure you protect against losses if the stock rallies higher…

Cheers.
Kris Sayce
For Money Morning Australia

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In an interview on Vietnam.net Bridge the general director of Jetstar Pacific Airlines, Le Song Lai, says it will need $US 45 million in additional capital this year to stay in business, and is currently being forced to pay for its fuel requirements a day in advance to Vinapco, the state owned fuel monopoly, after racking up unpaid bills of $US 8 million.

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