Cargojet gets a huge price target raise from Beacon Securities

Cargojet (Cargojet Stock Quote, Chart, News TSX:CJT) is already up big time in 2020 but there’s more where that came from according to Beacon Securities analyst Ahmad Shaath who sees tailwinds aplenty for the overnight cargo company.

In an update to clients on Wednesday, Shaath reiterated his “Buy” rating and lifted his target price from $250 to $310, representing at press time a projected 12-month return of 38 per cent.

E-commerce giant Amazon had its annual Prime Day event this week, and Shaath took note of the changes to retail’s approach the upcoming holiday season, saying businesses are planning on spreading out the shopping season in aid of dampening a second wave of COVID-19 (Walmart, for example, is closing stores on Thanksgiving Day in the US, while many stores are extending the buying period also due to supply chain constraints).

Shaath said the longer shopping period will be a boon for Mississauga-based Cargojet, providers of air cargo services across North America, to the Caribbean and Europe.

“Coupled with increased industry-wide participation in Prime-Day-like promotions by other retailers, CJT is poised for exceptionally-long peak-demand season (i.e., an extra four weeks). While overall consumer spending might not witness an above-average growth given the pandemic, the longer shopping season and the uptick in eCommerce as a percentage of total retail sales should benefit CJT immensely,” Shaath wrote.

Along with its Domestic Overnight business, Cargojet has an Aircraft, Crew, Maintenance and Insurance (ACMI) segment and an All-In Charter service, both of which should also continue to flourish, according to Shaath, who referenced recent cargo data from the International Air Transport Association (IATA) which said plane belly capacity continues to be near all-time highs, with North America continuing to outpace
the industry in year-over-year improvement and the transatlantic trade lane continuing to struggle with a lack of capacity. Ongoing struggles in the passenger airline industry are also a strong tailwind.

“These trends are positive for CJT’s ACMI and all-in charter revenues, a large portion of which are driven by DHL. Thus we believe CJT is greatly positioned for another positive surprise that would be driven by one or both of these revenue lines, as well as additional ACMI routes with DHL beyond what is currently expected by the Street,” Shaath wrote.

On DHL, Shaath said its relationship with CJT is “very strong” and that Cargojet is likely to expand its business with the delivery company as a result.

Shaath has revised his forecast as a result, shifting full-year 2020 revenue from $614 million to $628 million and adjusted EBITDA from $247 million to $260 million. For 2021, Shaath has moved revenue from $520 million to $588 million and EBITDA from $236 million to $282 million.

Cargojet last reported earnings on August 6, where its second quarter featured revenue of $196.1 million compared to $119.1 million a year earlier and adjusted EBITDA of $91.1 million compared to $37.5 million a year earlier.

According to eMarketer the COVID-19 pandemic has pushed eCommerce growth ahead to the point where we are now at levels not expected to be seen until 2022.

eMarketer said eCommerce sales in the United States are expected to reach $794.50 billion this year, which would be up a stunning 32.4% year-over-year. That figure would be online sales account for more than 14 per cent of all purchases made.

“We’ve seen ecommerce accelerate in ways that didn’t seem possible last spring, given the extent of the economic crisis,” said Andrew Lipsman, eMarketer principal analyst at Insider Intelligence. “While much of the shift has been led by essential categories like grocery, there has been surprising strength in discretionary categories like consumer electronics and home furnishings that benefited from pandemic-driven lifestyle needs.”

Another eMarketer editor said the trend may result in some dramatic changes to the retail landscape.

“There will be some lasting impacts from the pandemic that will fundamentally change how people shop,” said Cindy Liu, eMarketer senior forecasting analyst at Insider Intelligence. “For one, many stores, particularly department stores, may close permanently. Secondly, we believe consumer shopping behaviors will permanently change. Many consumers have either shopped online for the first time or shopped in new categories (i.e., groceries). Both the increase in new users and frequency of purchasing will have a lasting impact on retail.”

Steven Davidoff Solomon,the faculty director at the Berkeley Center for Law, Business and the Economy thinks there may be fundamental reasons behind the growth of large companies like Amazon during times of crisis. Writing in the New York Times, he said the crisis windows allows giants to sidestep antitrust regulations.

“Consider last week’s decision by British regulators to allow Amazon’s investment in the London-based food delivery start-up Deliveroo,” Davidoff Solomon noted. “Amazon said last May that it was joining a $575 million fund-raising round, valuing Deliveroo at perhaps as much as $4 billion. Britain’s Competition and Markets Authority halted the deal because it thought it might be bad for competition. That was before the pandemic. Deliveroo argued that, without Amazon’s money, it would have to shut down. The British antitrust authority backed down, saying that if Deliveroo went bust, it “could mean that some customers are cut off from online food delivery altogether, with others facing higher prices or a reduction in service quality.”

“Expect this to be repeated elsewhere,” the author argued.