Shares of Canadaâs leading air cargo company, Cargojet (TSX:CJT), have delivered solid returns over the past decade. Its stock has gained nearly 686%, reflecting a compound annual growth rate (CAGR) of impressive 22.9%. What stands out is that this growth includes the recent correction in its price.
Investors should note that the pandemic significantly elevated the demand for Cargojetâs offerings, boosting its financials and share price. However, Cargojet stock gave up all pandemic-led gains and dropped nearly 54% in the past two years. This decline can be attributed to the normalization of demand following the economic reopening. Moreover, macro headwinds took a toll on consumer spending and slowed the demand for products that Cargojet transports, in turn, affecting its financials and share price.
While Cargojet has lost substantial value, I maintain a bullish outlook on this Canadian stock. With this backdrop, letâs examine three reasons to understand why Iâm buying Cargojet stock today.
Cargojet is driving efficiency and preserving cash
Macroeconomic challenges are exerting pressure on Cargojet’s shipping volumes. Despite battling with reduced demand and excess capacity, the company is actively pursuing strategies to enhance efficiency and preserve cash.
Cargojet is taking steps to curtail capital expenditures and reduce operational costs, which is encouraging. Moreover, in response to the volume weakness, the company is optimizing its domestic network by decreasing the number of block hours while still upholding the optimum service level. Furthermore, it has adjusted the costs related to temporary employees, overtime, and training, which supports its margins.
The company’s focus on driving efficiency and preserving cash positions it well to easily navigate the short-term headwinds. Moreover, Cargojetâs long-term contracts add resiliency to its financial and operating performance.
Customer contracts add stability
CargojetâsÂ fundamentalsÂ remain strong, despite facing near-term headwinds from lower volumes. Itâs worth highlighting that Cargojetâs long-term customer contracts are supported by minimum volume guarantees and renewal options. Thus adding stability and visibility over future revenues. Further, these contracts have cost pass-through provisions that support and protect margins in an uncontrollable variable cost environment.
Cargojet’s earnings are poised for growth thanks to its valuable alliances with prominent logistics brands. The company has solidified its partnerships with Canada Post and Purolator. Moreover, these agreements are supported by minimum guaranteed volume commitments. Additionally, Cargojet has also renewed and extended its contract with United Parcel Service Canada. Notably, the company has also established strategic collaborations with industry giants like DHL and Amazon. These strategic agreements will cushion its earnings by driving demand for its services, including charter, aircraft dry lease services, and ACMI (Aircraft, Crew, Maintenance, and Insurance).
Cargojet stock looks attractive on the valuation front
With the recent correction in its stock price, Cargojet presents an appealing opportunity from a valuation perspective. It trades at next 12-month price-to-earnings multiple of 21.1, significantly lower than its pre-pandemic levels of nearly 40. Additionally, the company has highlighted that its revenue and EBITDA run rate have doubled compared to the levels it had before the pandemic. This reinforces my positive outlook on the stock.
Investors should note that Cargojet is a dominant player in Canadaâs air cargo space. Its focus on driving efficiency and preserving cash, customer contracts, and low valuation make it a compelling long-term bet. Additionally, its ability to offer next-day delivery to more than 90% of Canadian households presents a solid competitive edge over its peers. Moreover, Cargojet maintains an impressive customer retention rate.
To sum it up, the company’s strong fundamentals, well-established domestic network, anticipated recovery in the e-commerce sector, and focus on reducing debt bode well for its growth and will likely drive its share price higher.
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* Returns as of 10/10/23
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Fool contributorÂ Sneha Nahata has no position in any of the stocks mentioned. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Foolâs board of directors. The Motley Fool has positions in and recommends Cargojet. The Motley Fool recommends Amazon. The Motley Fool has a disclosure policy.