CargoJet (CargoJet Stock Quote, Chart, News TSX:CJT) has come a long way in the past three years but the stock could have more upside, says Robert McWhirter of Selective Asset Management, who argues that the transport company’s latest deal with Amazon is deserving of investors’ attention.
“They do overnight air cargo transportation mainly within the four walls of Canada,” says McWhirter, president of Selective, who spoke to BNN Bloomberg on Monday. “The real news recently was that they struck a deal with Amazon.”
“Basically, Amazon says, ‘Here are our packages, please deliver them for us’ and Amazon has the ability to invest in Cargojet stock at fixed prices based on volume of future business that Amazon does with CargoJet,” said McWhirter.
“This is important because at the moment, Amazon basically says, ‘Okay, we’re building out our fleet of
planes in the US but let’s continue to outsource this to someone in Canada.’”
CargoJet had been humming along just fine, showing solid top and bottom line growth and increasing its share price from the $25 level in early 2016 to $98 per share by July of this year. Then came the Amazon announcement on August 23 and the stock shot up 20 per cent overnight to $108 per share (CJT has pulled back since and currently trades at $94).
“The commercial relationship the CargoJet team continues to build with Amazon has now allowed us to further strengthen and align our long-term strategic commercial interests. Our continuous commitment to provide value added services enables us to earn all of our customers' trust as the leading overnight air-network operator," said CargoJet CEO Ajay Virmani in a press release announcing the Amazon deal.
“Cargojet has been a key player in our Canadian middle mile operations for several years,” said Adam Baker, Vice President Global Transportation, Amazon. “We're thrilled to build a longer-term relationship that will allow us to provide even faster service to Amazon customers in Canada.”
Airlines are a notoriously fraught space for investors where external factors such as the price of oil can dramatically alter a company’s fortunes, not to mention the damper on air travel that economic downturns can cause. But CargoJet may be less prone to such vicissitudes than other names such as Air Canada and WestJet, notably as the e-commerce space is likely to keep growing.
Bryden Teich of Avenue Investment recently praised CargoJet over regional airline Chorus Aviation.
“The one that we do like and has performed well is CargoJet,” he said. “We don’t own it but it’s on our list. The overnight freight parcel business has been a boom for CargoJet as is teaming up with Amazon. So there’s much more of a tailwind for an airline with those kinds of dynamics than going into Chorus at this end of the cycle,” said Teich.
CargoJet, which pays a modest dividend of about one per cent, last reported its earnings in late July, showing revenue up nine per cent year-over-year to $119.1 million and adjusted EBITDA of $37.5 million, itself an increase of 30 per cent year-over-year.
Management called for a rosy future, as well, noted McWhirter.
“Earnings estimates were up 15 per cent in the last 90 days and earnings are forecasted to grow 96 per cent in 2020 with a 35-per-cent earnings gain in 2021,” McWhirter says. “There are ten analysts that cover the company with a $117 average price target, which implies a 23-per-cent upside.”