Originally Posted by
Roger
Its all about earnings. There are many different theories doing the rounds about how oil will do this or that and its effect on AIR. For mine, its about drawing a line in the sand and saying what EPS is AIR capable of earning on a sustained normalised basis without the tailwind of lower oil and I keep coming back to a minimum of 35 cps and an average 10 year PE of 10.5. This is what I see as a minimum and you could easily make arguments for far more and a higher PE seeing as PE's are implicitly interest rate sensitive, (lowest interest rates in 50 years implies a PE of at least 1 more is easily justified)
I've run the ruler over its peer across the Tasman. No matter which way you slice and dice it EPS, growth outlook, Price to book, balance sheet strength AIR looks very cheap relative to its closest peer.
QAN will be subject to ostensibly not dissimilar macro economic influences as AIR so as mentioned previously its completely illogical that analysts covering QAN are ostensibly saying its immune in its future earnings projections to a potential rebound in oil prices whereas N.Z. analysts are saying AIR's earnings get belted. AIR probably the most misunderstood stock on the NZX...you can't imagine that current airfare specials will be as good if oil prices go back up so effectively if yields rise back up by 3-4% over time much of the effect of any increase in oil prices is mitigated.
Has anyone noticed that the cash register is ringing like crazy in soft economic conditions ? Barring a major exogenous shock, in my opinion oil only goes back up when decent world-wide growth is re-established...what ever year that might be, who knows ? and even when it does demand goes up with world-wide growth and so does yield IMO.