Is the Qantas share price overvalued right now?

The Qantas Airways Ltd (ASX: QAN) share price has been performing strongly in 2019.

The group’s shares are up 23.96% to $7.14 per share and have marginally outperformed the S&P/ASX 200 Index (INDEXASX: XJO).

However, the group could be facing a significant liability from its frequent flyer program according to an article published in the Australian Financial Review (AFR) last Friday.

The AFR article suggested that Qantas is looking at $2.5 billion of unredeemed frequent flyer points in FY19. That’s more than the income from its Loyalty business segment by about 50% and roughly 13.7% of total revenue.

These points could be a hidden liability distorting Qantas’ true valuation, and the Qantas share price did edge lower on Friday.

But Qantas isn’t the only one facing questions about these hidden loyalty program liabilities.

Virgin Australia Holdings Ltd (ASX: VAH) is reportedly facing a $500 million liability, or 8.5% of total group revenue.

That’s about 20% higher than its own loyalty segment’s revenue, says the AFR.

However, it’s not all doom and gloom for shareholders in the nation’s major airlines. Fund managers seem unfazed by the liabilities and believe they are an important part of the airlines’ operational and earnings expansion.

How have the airlines performed in 2019?

The Qantas share price is up 23.96% this year, while Virgin shares have struggled to climb higher.

Virgin shares are down 15.79% since the start of January, largely due to weak earnings. The airline has looked to strengthen its relationship with Virgin Atlantic and expand its international flight network.

The recent AFR article could raise some questions about both airlines’ current valuations. This combined with rising oil prices could see their share prices under pressure early this week.

Foolish takeaway

Both of these Aussie airlines lean heavily on their loyalty programs to generate revenue. That means the unclaimed rewards could be seen as having asset-like qualities in terms of driving future earnings.

However, the need to provide services for these points could cause some headaches if they continue to grow in FY20.

The Qantas and Virgin share prices are worth watching in December to see how investors feel about it all. 

The post Is the Qantas share price overvalued right now? appeared first on Motley Fool Australia.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019

Source link Finance News Australia

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