Two reasons Cargojet is down

The stock was an early COVID winner, but portfolio manager Varun Anand says there are two main reasons why the share price for Canadian overnight freight company Cargojet (Cargojet Stock Quote, Charts, News, Analysts, Financials TSX:CJT) has dropped over the past year and a half, neither of which should keep investors from buying CJT.

Mississauga-based Cargojet, which has air cargo services across North America along with an airplane-leasing ACMI (Aircraft, Crew, Maintenance and Insurance) business and a charter plane segment, saw its share price double in 2020 as the market took to shipping and e-commerce-related stocks during pandemic-induced lockdowns. But just as names like Amazon and Shopify have now been brought down a peg or two after that initial euphoria, such has been the case for Cargojet, whose share price went from $240 in late 2020 to now around $150, a significant pullback and one that Anand thinks is overdone.

“I’ve been buying it,” said Anand, vice president of Starlight Capital, who spoke on BNN Bloomberg on Thursday. “With Cargojet, what you’ve seen is over the past year is two things that really brought the stock price down. The first is a couple quarters ago, they announced that they were expanding their fleet and for some investors they didn’t like that idea because they didn’t want them to take the risk of expanding internationally. They were hoping they would just get dividend growth instead.”

“My response to that is the company has a 17-year track record of executing well and filling up planes in record time, so I don’t see you why we’re not going to give them credit now when they’re seen opportunities,” he said.

“Subsequent to that, they announced a mega deal with DHL that would basically backfill more than half of the capacity that they’re bringing online. So from that standpoint, it’s very positive,” Anand said.

Cargojet’s buildout has been extensive. The company announced earlier this year a plan to purchase six additional B777 aircraft and two additional B757’s to bring its fleet to 50 planes, which management said would add $1.1 billion in capex this year. Cargojet President and CEO Ajay Virmani called it an aggressive move to diversify and take advantage of growth opportunities as the surge in shipping and e-commerce continues and global supply chains rework themselves.

“Ever since March 2020, we have been constantly adapting to the changing air-cargo landscape. The recent geo-political events have further added pressure on the already strained traditional supply chains but they are also creating new opportunities for air-cargo.” said Virmani in a press release on the release of the company’s first quarter 2022 earnings.

Already having secured a major partnership with Amazon last year, Cargojet announced in March of this year a strategic agreement with shipper DHL to lease CJT planes on an ACMI basis. The deal is an expansion on the two companies’ previous arrangement and includes five additional CJT B767’s to its fleet in 2022 and 2023 along with four B777’s, with Virmani calling the partnership a “remarkable milestone” for CJT.

“We are even more excited about the opportunity to add value and earn the right to be a long-term strategic partner each and every day,” said Virmani in a press release.

Anand also chalked up the CJT pullback to broader investor concern about economic contraction, which could play a role in Cargojet’s future but the fund manager says the worry is overstated.

“The second factor that has dragged down shares is concerns of an economic slowdown and freight rates coming down and e-commerce volumes coming down. This one is a little bit more nuanced in terms of how it impacts Cargojet, but if I were to look at transport companies today Cargojet is still very well positioned. They have a dominant share in Canada, which has not seen as much softness and freight rates, and air cargo rates still remain higher than pre-COVID levels, even if demand is coming down a bit,” Anand said.

“So, from a pricing standpoint, they’re still in a good position,” he said. “We still like Cargojet and we’d be adding at current levels and we think out of the air cargo freight and logistics space, it’s our top pick.”

Cargojet’s first quarter earnings last month featured revenue of $233.6 million for the Q1 2022 compared to $160.3 million a year earlier for a 46 per cent growth rate. Adjusted EBITDA was $83.0 million compared to $64.2 million a year earlier. Both top and bottom lines were ahead of analysts’ expectations at consensus estimates of $209 million and $75 million, respectively.

“We are acutely aware of the uncertainties and are well positioned to not only tackle them but capitalize wherever new opportunities are emerging. The investments we made in aircraft acquisition, technology and in attracting and retaining top talent are paying off, allowing us to scale up the business in a seamless manner,” said Virmani in the first quarter press release.