Cargojet is here to stay, this investor says

Overnight freight company Cargojet (Cargojet Stock Quote, Chart, News, Analysts, Financials TSX:CJT) was certainly a beneficiary of the pandemic but what’s the stock looking like longer-term? Great, says Caldwell Investment Management’s Jennifer Radman, who thinks the structural changes in the shipping industry brought about by COVID will be tailwinds for Cargojet going forward.

Early last year was definitely the time to be buying Cargojet, which has air cargo services across North America, the Caribbean and Europe along with a charter plane business and an ACMI (Aircraft, Crew, Maintenance and Insurance) segment. The stock initially nosedived during the market pullback in February and March but then took off as the market saw the potential for growth in the company’s business due to the surge in e-commerce that came about as a result of the stay-at-home economy.

The end product was a stock that returned 108 per cent for 2020, although CJT has pulled back over ensuing weeks and is now down seven per cent in 2021.

And while COVID certainly gave a boost to a number of companies, Radman thinks there’s a bigger story to Cargojet than a short-term, pandemic-related uptick in business.

“Cargojet is one of our holdings in our Canadian momentum strategy. We bought it in late 2018 and have held it through pre-COVID, after COVID and even today,” said Radman, head of investments and senior portfolio manager at Caldwell, who spoke on BNN Bloomberg on Monday.

“That big run up in [the stock] was really speaking to some of these companies that really had a big benefit from the COVID environment and Cargojet was one of them,” Radman said. “You just didn’t see you know a lot of capacity in passenger aircraft, and that was very good for them on the volume side and very good on the pricing side.”

“As much as we talk about some of these names that did well through COVID, now they’re having tough comps to repeat. I think … you have to make a distinction between what’s just a tough comp and what was a one-time benefit versus the companies that are seeing a more structural benefit from the COVID environment, and I think Cargojet is in that latter camp,” Radman said.

Along with the overall rise in shipping via e-commerce, one of the bigger developments for Cargojet over the last couple of years came when the company signed a strategic agreement with Amazon in August of 2019. There, Cargojet deepened its ties with Amazon, a client of the company’s charter aircraft service, by giving Amazon the right to own up to 14.9 per cent of Cargojet based on Amazon’s delivering of up to $600 million in business to Cargojet over a six-and-a-half-year period.

That deal was the boost of confidence Cargojet shareholders were looking for, as up until that point it was unknown whether or not Amazon would use some of its might to muscle in on CJT’s business. Instead, the partnership made Cargojet’s growth trajectory a lot clearer.

Now, Radman says there’s an industry-wide shift in shipping from passenger planes to dedicated cargo planes like CJT’s.

“Some of these clients for which Cargojet does overnight cargo have historically relied on the passenger planes are now saying, ‘That’s not really a reliable network or solution for us right now,’ and so they’re looking more at going with dedicated overnight carriers such as Cargojet,” Radman said.

“That’s an example of that structural shift, so instead of seeing a situation where you have a big benefit and then fall-off the following year [from COVID-19], we think it’s the new normal and [Cargojet] can continue to grow from there,” Radman said. “And for that reason we continue to be bullish on Cargojet.”

Expected to release its 2020 Q4 financials on March 1, Cargojet saw revenue in its last reported quarter go from $117.4 million in Q3 2019 to $162.3 million and adjusted EBITDA double from $39.1 million to $78.1 million. Both were well ahead of analysts’ calls for EBITDA of $62 million on a topline of $153 million.

Earlier this month, Cargojet closed on a $365-million bought deal equity offering, including over-allotment, issuing about 1.7 million shares at $213.25 per share. CJT followed up with the announcement on February 10 that it would be expanding both its fleet of aircraft and routes in aid of meeting growth opportunities both domestically and internationally.

The expansion will feature five Boeing 767 freighters and two Boeing 777 freighters, which will being arriving by the third quarter of 2021.

“With this expanded fleet, Cargojet will be better positioned to meet the growth expectations of its customers and build on its strong domestic network covering 15 major cities everyday while selectively adding International destinations that will strategically position Cargojet to service fast growing domestic and cross-border e-Commerce and urgent-cargo opportunities,” Cargojet said in a press release. “In addition, Cargojet will continue to explore and focus on additional growth opportunities in the vast US market.”