Qantas gets a second move to junk status

Following on from S&P downgrading QAN to junk status in December, today has seen Moody’s following suit, with QAN moved to BBa2 with a negative outlook.

This leaves QAN in the horrible position of being unable to react to market conditions and puts capital management under even more pressure as interest payments balloon, leaving CAPEX contracts outstanding and organic spending in a freeze.

QAN is like a political football at the moment as all sides of politics continue to add their two cents regarding the handling of the Qantas Sale Act and whether to relax the foreign ownership laws in the Act or whether to give QAN a government-guaranteed backstop to repayment to allow its credit rating to stabilise. Both have pros and cons, but both can be seen as overly protectionist or overly exposed market forces; neither of which have a bi-partisan backing.

The QAN issues are well known and are unlikely to be alleviated anytime soon as the international business continues to suffer and Jetstar’s Asian operations fail to pick up the slack.

The trade

However what is clear is that there is considerable buying strength in QAN around the $1 mark and that looks to be holding true. The news from Moody’s today was not unexpected and the share price reaction to the news has been muted.

What I see as a potential trade idea is buying QAN on weakness. If the share price was to drop below the $1.08 level (23.6% retracement level) there is solid support for the stock on the belief that the federal government will be forced to act in some shape or form.

Therefore I would look to pick up QAN on a drop below $1.08, with a stop loss on the bottom level at $0.95. I see any positive news regarding QAN’s credit situation or share registry as a catalyst to leg up to the 50% and the 61.8% retracement levels of the fall that start in November when the first announcement around QAN’s finances arose. Put your limit in at $1.30 which is the 61.8% retracement of the high to low, as that is likely to be the point for profit-taking.

Qantas

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