Cargojet is our “Canada Best Idea”, this analyst says

TD Cowen analyst Tim James says Cargojet’s (Cargojet Stock Quote, Chart, News, Analysts, Financials TSX:CJT) valuation does not reflect the company’s business resilience or potential earnings upside.

As reported by the Globe and Mail, James named Cargojet his “Canada Best Idea” and reiterated his “Buy” rating and $128.00 target. The average target is $121.85.

“We believe the drivers of past share price and valuation pressure are becoming less relevant and that the historically low valuation fails to reflect the business resiliency and earnings upside,” James said.

He said an eventual return to ACMI revenue growth, improved aircraft utilization and new ACMI and charter agreements could provide catalysts.

Last month Cargojet reported Q2 revenue of $275.8-million, up 15.8% year-over-year. Domestic network, ACMI and charter revenue rose 7.5% to $219.9-million, while fuel surcharge and other revenue increased 52.7% to $58.5-million.

Adjusted EBITDA was $87.3-million, up 8.9% from a year earlier, while free cash flow improved to $56.2-million from an outflow of $72.5-million.

Cargojet said its fuel pass-through mechanisms offset higher fuel costs in Q2, leaving no material impact on Adjusted EBITDA, though margins were compressed by about 260 basis points.

“Cargojet’s resilience and ability to adapt quickly to changing market and operational conditions continued to be key differentiators in the second quarter,” the company said in its MD&A.

The company said charter revenue rose $14.9-million, or 37.4%, as new charter opportunities replaced and exceeded revenue from transpacific flying in the prior year.

Cargojet also said free cash flow generation helped reduce its net debt-to-Adjusted EBITDA ratio to 2.6 times from 2.8 times, approaching its long-term target range of 1.5 times to 2.5 times.

James said those results support his view that the company’s fundamentals are improving as past pressures fade.

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