Cargojet looks like a Buy, this portfolio manager says

After a huge 2020, Canadian overnight cargo company Cargojet (Cargojet Stock Quote, Charts, News, Analysts, Financials TSX:CJT) has been underwhelming this year from an investor’s point of view, but Andrew Pyle of CIBC Wood Gundy thinks now might be the time to either put the name in your portfolio or add to your position.

“The company is doing very well, especially in the middle of what is really hurting a lot of other companies in terms of the supply constraints and supply crunch,” said Pyle, speaking on BNN Bloomberg on Monday.

“This is one company that I think does well in this environment,” he said.

Cargojet shares fell on Monday by five and a half per cent after the company released its financials for the third quarter 2021, showing revenues up 17 per cent compared to a year earlier to $189.5 million and adjusted EBITDA up slightly to $70.9 million compared to $69.8 million a year earlier.

The company, which operates via three key market segments in domestic overnight cargo, an ACMI business (aircraft, crew, maintenance and insurance) and a charter plane segment, said ACMI led the way over the Q3 with 21 per cent year-over-year growth, while the company touted its more diversified business, saying its Domestic Network revenue for the third quarter accounted for under 42 per cent of total revenue compared to 54 per cent a year earlier.

Cargojet said the ongoing jamming up of worldwide supply chains represents an opportunity for air cargo companies and that the issue will likely persist through the holiday season.

“As economies and businesses re-open, Consumers are keen to step out and experience in-person shopping. But our longer-term outlook for e-Commerce remains strong, particularly given the dramatic uplift in digital adoption over the past 18 months,” said Dr. Ajay Virmani, Cargojet President & CEO, in a press release.

“We are also excited about the opportunities emerging in the international air-cargo segment. Over the past few quarters, we have methodically invested in talent, infrastructure and aircrafts necessary to build a strong international business and are beginning to see encouraging results. Our team of dedicated professionals continues to be the driving force of our ongoing success. Each member of our team focuses and delivers customer excellence,” he said.

Cargojet, which does over 90 per cent of domestic overnight air cargo business in Canada, has about 75 per cent of its Domestic revenues under long-term contracts, which involve variable surcharges for uncontrollable cost changes such as fuel and regulatory changes. 

On its ACMI business, the company currently operates ten dedicated routes for delivery company DHL, while Cargojet also uses those Domestic and ACMI aircraft for its Adhoc Charter business where the company says both international charter rates and demand have surged through COVID-19 since with fewer passenger planes in service there are fewer cargo options available. 

The tailwind of e-commerce throughout the pandemic and beyond has also been of benefit to Cargojet, with the company announcing this past April a new four-year service agreement with Amazon. Cargojet said it will operate two Amazon-owned aircraft as part of the Amazon Air network on a Crew, Maintenance and Insurance (CMI) basis within Canada.

Pyle said because of its strong suits, investors are likely to do well by Cargojet even within a market correction type of environment.

“The stock has come off recently and I think from a technical point of view we’re close to trend line support levels, so I would think this isn’t a bad time to start adding some to the portfolio,” Pyle said.

“And I do think it’s one of those stocks that can probably write out a more general correction in the broader markets just because of the way it’s positioned,” he said.

Cargojet finished 2020 up 108 per cent, while so far in 2021 the stock is down about 13 per cent.

Earlier this year, Cargojet announced a plan to expand its fleet and routes to meet demand domestically and internationally. 

“Having successfully raised $365 million [in February] through an equity raise to pay off debt and acquire new aircraft, Cargojet is rapidly moving forward to execute on its growth strategy to capture additional e-Commerce volumes and international air-freight opportunities through an expanded fleet,” the company said in a February 10 press release.

In total, CJT plans to add five Boeing 767 freighters this year with two of them to be deployed on the domestic fleet and three for international routes, two Boeing 777 freighters to arrive in 2023 for long-haul Asian routes and potentially two more B-777s in 2024.

“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,” the company said.