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Stockwatch: Qantas (QAN), Telstra (TLS) and Onesteel (OST)

November 10th, 2011 · Greg Atkinson · 19 Comments

In the midst this stock market turmoil there may be some battered down stocks which present the opportunity for investors to buy shares in quality companies at bargain prices. Three Australian companies that might fall into that category are Qantas Airways, Telstra Corporation and Onesteel Limited.

Let’s start with a company that has been in the news for all the wrong reasons: Qantas Airways Limited (ASX:QAN). Some years ago Qantas was flying high and its shares were trading around $6 during the ill-fated takeover bid by Airline Partners Australia. But after that deal fell apart in 2007, the Qantas share price slumped has languished ever since.

Qantas Airways Limited (ASX:QAN) 5 year stock price chart

qantas_5_year_chart_nov11

Qantas rules the skies as far as domestic airline travel is concerned but on it’s international routes it is facing increasing competition from low cost carriers and airlines in Asia that operate from international airport hubs.

Qantas will probably continue to do well in the Australian domestic air travel market but it’s hard to see things improving for them on the international front. For Qantas to compete effectively on international routes they will need to operate from an Asian hub airport or merge with another airline.

At $1.58 per share the P/E ratio for Qantas is around 12 which is reasonable but its ROE (Return on Equity) is a poor 4.3%. About the only thing that interests me regarding Qantas shares is their book value which is currently around $2.70.

Due to foreign ownership restrictions it would be hard for Qantas to be taken over by another airline or investment group outside Australia, but there does seem to be some scope to sell some parts of Qantas and perhaps merge some business areas and/or operations with another airline.

For that reason alone I have Qantas on my watch list and I just might be tempted to pick up a few shares if they drifted down below their 52 week low of $1.35.

Another stock worth looking at is Telstra (ASX:TLS) It’s one of those companies people love to hate but despite this, it is the market leader in the telecommunications services sector in Australia. Its mobile business is very profitable and thanks to the blunders at Vodafone, it only has to worry about Optus these days.

Thankfully the days of Sol Trujillo are long gone and the new management team appear to be rebuilding the company. Their big challenge will be to deal with NBN Co. (which is effectively a state run monopoly), but I reckon Telstra will have the last laugh when the NBN turns out to be a commercial flop.

Telstra Corporation (ASX:TLS) 5 year stock price chart

telstra_5_year_chart_nov11

The share price chart for Telstra looks promising. At today’s close of $3.11 the P/E ratio for the stock is around 12 and the ROE is an impressive 26%. So perhaps the worst days for Telstra are behind them and in the years ahead patient shareholders might be rewarded?

In any case my view is that Telstra shares are well worth watching and if they were to head down near $3.00 again that would stir my interest, especially since Telstra pay quite an attractive fully franked dividend.

Finally lets have a look at a stock which has been savaged as a result of the financial crisis and high Australian dollar – Onesteel Limited. (ASX:OST)

Onesteel Limited (ASX:OST) 5 year stock price chart

onesteel_5_year_chart_nov11

Onesteel is actually more than just a steel making company and is also involved for example in metals recycling and produces speciality products such as railway wheels and aluminium roofing. You would think that during a ‘mining boom’ business for OneSteel would be going well, but that doesn’t seem to be the case.

Onesteel’s exports have been hurt by the high AUD whereas imported steel products are efficiently cheaper, plus the company also has to deal with higher raw materials costs.

Onesteel shares closed today at $1.00 which gives them P/E ratio of 5.4 which appears very attractive. But Onesteel’s ROE is quite low at 5.3% and considering the challenges the company faces it’s difficult to find reasons to get excited about this stock.

At this stage even if the OST share drop below it’s 52 week low of $0.92 I wouldn’t be a buyer. There are simply much more promising stocks around at the moment.

Please remember that I not suggesting anyone buy, hold or sell any stocks based on my ramblings. Please do you own research and obtain professional investment advice if needed.

Disclaimer: I do not hold stocks in any of the above companies although I have once held shares in Qantas & Telstra.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


19 responses so far ↓

  • 1 Mr Editor // Nov 11, 2011 at 6:54 am

    I don’t like to invest in airlines because of they’re exposure to oil prices, unions, accidents, weather, terrorist attacks and the fact that it’s a commodity-type business are all factors that deter me from ever investing in airlines.

  • 2 Greg Atkinson // Nov 11, 2011 at 7:32 am

    Mr Ed I believe there is a joke about airlines that goes something like this: How to you make a millionaire? Take a billionaire and get them to buy an airline.

    I imagine some of the cut price airlines will do okay but it’s going to be a tough business especially when oil prices creep up again. As for the big airlines, I suspect the trend towards mergers will continue and that it is only a matter of time before Qantas ends up merged or in a close tie-up with another airline. Singapore Airlines perhaps?

  • 3 Stillgotshoeson // Nov 11, 2011 at 10:08 am

    I am a little gun shy of Qantas and Onesteel at the moment, however I like Telstra as a great income stock, a dip below $3 will be a chance to add more to my portfolio. Through Super and with franking credits the yield is up around 13% which is not to be sneezed at. I hold no significant capital gain future for TLS. If they are 50% up in 5 years that will be a good result. 10% to 13% return per year with a capital growth of 30% to 50% over a 5 year period will likely see one double their investment. Still expecting a further drop in the ASX so will hold of adding more to my portfolio at this stage.

    Qantas and Onesteel could potentially become good purchases, however with so many stocks available on the ASX I see much better value elsewhere so they do not interest me.

    The comments of the writer are my opinion and should not be taken as financial advice.

  • 4 Greg Atkinson // Nov 12, 2011 at 7:09 am

    I agree with you. TLS is worth watching & the dividend is very attractive.

  • 5 Stillgotshoeson // Nov 12, 2011 at 8:04 am

    I have quite a few stocks on my watch list that are for income purposes as part of my early retirement plan.

    Volatility of the market over the coming year or 2 means I will keep my flexible approach to equities. Current bias is towards precious metals as I expect them to outperform over the next couple of years. When the market turns on precious metals though it is most likely to be sudden and hard so I have an out position set for those stocks, could be well short of what they end up going to but that is not my concern. Timing the market is a mugs a game. I will get out of PM’s when I am happy with where I am at and back into the general equity market, hopefully prior to the next bull run. May mean I go out of PM’s and into equities too early.

  • 6 Stillgotshoeson // Nov 12, 2011 at 4:10 pm

    A few on my watchlist have been beaten down to around 10% of their highs and are now at levels that are equal to the dividends they were paying.

    Not interested in putting my hard earned onto them yet in this current global economic climate. Is an appealing thought though, to be able to be getting dividend returns annually on an equity you purchase that is equal to the purchase price. Imagine buying a property for $300000 and getting $300000 a year in rent for it..

  • 7 Leigh // Nov 13, 2011 at 4:52 pm

    Agreed, Telstra is the love to hate stock , but it is also the most consistent dividend payer in the pack, even through the GFC and it is still in the box seat of telecommunications in Australia regardless of how the NBN goes. Greg, I think you might have missed your $3 buy, however there still appears to be enough doubt in the European recovery to drive it down purely on sentiment. It always surprises me how companies that are almost entirely Australian and make their money in Australia, such as WOW or TLS loose share value because of a debt problem that they are largely insulated from.
    As for QANTAS, I agree with MR Editor, too many things can go wrong with an airline. I arrived back today after four Virgin flights and really there is little difference in just getting quickly from one place to another except Virgin is cheaper. One Steel; again aren’t we looking at a lot of what if’s, with Australian steel makers?Perhaps we might miss a bargain if we wait until the Carbon tax is bedded down but I think I will take the risk on that one.

  • 8 Greg Atkinson // Nov 14, 2011 at 7:21 am

    Leigh when there is a major market sell-off it appears just about everything has been getting hit although some of the defensive stocks have held up a little better. But as you say, it doesn’t look like my wish for $3 TLS shares will be coming true anytime soon.

  • 9 Stillgotshoeson // Nov 14, 2011 at 11:08 am

    “But as you say, it doesn’t look like my wish for $3 TLS shares will be coming true anytime soon.”

    I think next year will give you an opportunity again.. Accumulate on dips to dollar cost average your purchase, load up on a significant pull back.

  • 10 gregnazvanov // Nov 23, 2011 at 11:39 am

    Interestingly the book value of Qantas (QAN) per share is $2.74 while the market price is about half of that ($1.52). While you could think buying it is cheap as the stock price collapsed from $6 in 2007 effectively erasing 3/4 of the price, you may consider actual risk return. Qantas shares are down 42.23% in a year and the beta is 1.32 meaning the volatility is higher than the market by 32%. If you review the last 5 years, the Qantas stock dropped -69.07% while the market dropped – 25.34%. We are unsure what implications of carbon tax will be, unless the planes fly on solar…With ROA of 1% and ROE of 4% projected it seems cash may be a better option. Yet fund managers put significant money in airlines in order to match the Aussie index according to mandates and this is passed on to superannuation account holders. For example, an industry fund Australia Super has 86% of assets in growth in it’s Balanced Fund that is a default option, so if you don’t want to make a choice you get 86% of your assets at market risk. In that 34% is invested in Australian shares and could be as high as 45% according to the PDS. So if you assume the market cap if ASX roughly as $1T and QAN market cap as $3.83, this means 3.83% of your super’s Aussie allocation by default goes to Qantas and unless you get this explained by your financial advisors in as much detail, your future expectations may be not as as rosy as you hope.

  • 11 Greg Atkinson // Nov 23, 2011 at 6:26 pm

    I think there is quite a bit of value locked up in Qantas but the foreign ownership rules make it impossible at this stage for it to be taken over by an overseas airline or foreign interests.

    Perhaps Jetstar might be split off somehow or sold as a separate entity?

    I would imagine that the Singapore Government would like to get their hands on Qantas if allowed to and if the price was right.

  • 12 Lachlan // Nov 25, 2011 at 8:50 am

    TLS has a reasonably persistent up trend in place and is trading around the centre which leaves me neutral however if they work down from here shortly then 2.95-3.00 will be the place to snag them for mine. Another scenario if we have a shake out as Greg says and good stocks get hammered then they could break down from the trend channel, past that entry price towards 2.80 from there could retest 2.55. I would run with the advice/comments above and add on any dips there even hoping for a new low because its seeming likely they would stage a sharp reversal. Anyhow I can wait. I invest income every week or two on whatever looks fair at the time. I’ll wait for 2.95/3.00 then to make first buy. Cheers all.

  • 13 Lachlan // Dec 2, 2011 at 6:59 am

    TLS looks bullish short term to me and could spike up ten cents or so…if so will have to wait longer but I do think chances of a sharp move down from xjo 4400/4600 areas are considerable due more to global financial reasons and may be prudent to wait for the lower targets like 2.55…hate missing bargains.

    Out there Shoes?…I think if its destiny that your lower asx low is going to come to fruition then it will be soon. Good luck…I think 😉

    3600 is my guess.

    On the asx upside, I think we would have to rally to 4600 break through and hold above for a while before we can hope for 5000 and beyond any time soon.

  • 14 Stillgotshoeson // Dec 2, 2011 at 9:22 am

    “be prudent to wait for the lower targets like 2.55…hate missing bargains.”

    If/when my new low is reached, I would not expect Telstra to fall this far, only reason I could see a fall that far is if people are selling them off to cover much bigger losses elsewhere in their portfolios. maybe $2.85. Picking/Knowing the bottom is impossible. I would be happy to accumulate more TLS under $3.

    Have purchased around 70k of shares this week, have standing orders for about 60k more, they just have not pulled back to my buy level yet so orders yet to go through.

  • 15 Lachlan // Dec 2, 2011 at 10:34 am

    Shoes I think you are right. I have this disposition of always wanting to pay low prices and save money but in this case maybe I am asking too much. Having said that I can see a very nice spot at 2.80 closing which may act as a support (horizontal resistance) and this translates in to a buy for me around there to 2.85 (depending on the time one has to watch and trade).
    There is also a spot at 2.95/3.00 I like and since it’s not much higher maybe I’ll stick with the plan to accumulate starting there.
    I like their chart very much and would be good for traders but I don’t have the tools here I once had. One can pick a bottom some of the time with precision but it is a time consuming process and I am not keen to give up that much of my time. Now I just buy around general support areas and accumulate on any further dips…after I establish a bullish case longer term I am convinced of.

  • 16 Stillgotshoeson // Dec 2, 2011 at 4:09 pm

    If the Daytrader is right and his worst case scenario for the ASX comes to fruition (1100). then TLS will be available for less than a $1 😉

    Ratings are out, 1 of my holdings has been rerated to the ASX100 (from 200)and another has been moved to the ASX200 from (300)

    I have a similiar view to buying, support levels and buying on dips. I do not always buy if a share hits my buy zone. I don’t go for the chasing every stock and every move method, not worth the time and anguish.

  • 17 Greg Atkinson // Dec 9, 2011 at 7:28 pm

    Well it looks like the Jetstar part of Qantas is already drifting offshore according to this report.

    TOKYO (Nikkei)–Jetstar Japan said Thursday that it will hire as many as 450 cabin crew members in the next few years.

    The joint venture between Japan Airlines Co., Australia’s Qantas Airways Ltd. group and Mitsubishi Corp. (8058) contends that such a huge workforce is necessary to achieve its plans of flying 24 aircraft in three to five years.

    Source: Jetstar Japan Seeks To Hire 450 For Cabin Crews

  • 18 Greg Atkinson // May 15, 2012 at 12:20 pm

    TLS now up near $3.70. Perhaps I should have picked up a few shares at around $3.20 after all!

  • 19 Greg Atkinson // Jun 8, 2012 at 6:55 pm

    Qantas shares closed today at 97c. Hard to imagine they were hovering around $6 in late 2007!

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