Cargojet is a “terrific” business, this investor says

It’s already up a ton in 2020 but the sectoral tailwinds keeping Cargojet (Cargojet Stock Quote, Chart, News TSX:CJT) flying high won’t let up anytime soon, says Barry Schwartz, chief investment officer at Baskin Wealth Management.

It’s hard to imagine investors not seeing this one coming. Fresh off solid gains in 2019 and a renewed partnership deal with e-commerce juggernaut Amazon, Cargojet came into 2020 on a high note, having just crested the $100 per share mark. The stock dropped hard with the market pullback in February and March, with Cargojet, an air cargo company with business across North America, the Caribbean and Europe and operating domestic overnight service between Canadian cities, seemingly getting lumped in with the airlines in the early days of panic surrounding COVID-19.

But the market has come to its senses, with CJT having now climbed past $200 in October and as high as $240 per share in early November.

Schwartz said Cargojet’s success is a no-brainer in the current economic environment where retail shopping continues to accelerate its migration to online platforms, resulting in unprecedented needs for shipping services.

“We’re importing stuff left and right, and Cargojet is pretty much really the only supplier [in Canada],” said Schwartz, speaking to BNN Bloomberg on Wednesday. “It competes I guess with Purolator and UPS and FedEx. But what was the announcement that FedEx and UPS had [on Wednesday]? ‘We don’t have enough vans and enough truck drivers!’ So, the demand is crazy.”

With tomorrow being Black Friday, the shopping season shifts into high gear from here, with for months now the message from retailers and shippers being about the upcoming bottleneck, glut, deluge — however you want to call it — of online business likely transpiring over the next few weeks.

“The surge in volumes that started in March/April of this year has already exceeded typical peak season volumes. With holiday shopping now shifting into high gear, and based on our customers’ forecasts we expect to handle even greater volumes in the coming weeks. This peak is expected to be like none other,” said Cargojet in a press release this week.

In response to the growth in demand, Cargojet said it has taken on additional staffing in pilots, ground handling and maintenance while also adding two more aircraft to its fleet and more flights per week, bumping up capacity by 20 per cent.

Air Canada, which began converting passenger planes to service cargo routes this spring as the pandemic shut down air travel, announced earlier this month it would be permanently converting some planes to freighters, looking to do about 100 cargo flights per week.

“Our nimble Cargo team has pivoted to dedicated all-cargo flights during the pandemic and Cargo will become an increasingly important segment of our business going forward,” said CEO Calin Rovinescu in a press release.

Schwartz said Air Canada’s increased presence in the air cargo business is something to keep an eye on for Cargojet investors.

“Cargojet pulled back about 15 or 20 per cent recently as Air Canada said, ‘We’re going to get back into the cargo jet business. We’ve got all these empty planes and we can compete also,’” Schwartz said.

“So, that’s interesting and that’s one of the risks that you have with Cargojet is the competition. But Amazon has taken a big stake in Cargojet [and] it’s just a terrific business,” he said.

“For us, I’d rather buy TFI International or one of the railroads. I’m more comfortable owning them, [but] I’m a huge believer in this e-commerce thing and I think we’re not going back, we’re only going forward,” he said. “There’s going to be a crazy party after this is all over but then I think people are going to realize, ‘I hate shopping at the mall.’ So, ultimately I think Cargojet and all of these companies are going to benefit.”

Cargojet released its third quarter 2020 results earlier this month, which beat analysts’ forecasts. Revenue was $162.3 million compared to $117.4 million a year earlier while adjusted EBITDA was $78.1 million compared to $39.1 million a year earlier. Analysts had been calling for revenue of $153 million and EBITDA st $62 million.

On the quarter, Beacon Securities analyst Ahmad Shaath said the structural changes to retail are showing no signs of slowing down and Cargojet will benefit from that. With an update to clients on November 3, Shaath kept his “Buy” rating and raised his target price from $310.00 to $325.00, which at press time represented a projected return of 34 per cent.

Shaath said Cargojet has markedly improved its balance sheet and now sits in “an enviable position” to access capital for funding growth, both in its Cargo business and in its Aircraft, Crew Maintenance and Insurance (ACMI) business providing dedicated planes for customers.