3 Reasons I’m Buying Cargojet Stock Today

Cargojet presents an appealing opportunity from a valuation perspective, reinforcing my positive outlook on the stock.

| More on:

Shares of Canada’s 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 Cargojet’s 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, let’s examine three reasons to understand why I’m 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, Cargojet’s long-term contracts add resiliency to its financial and operating performance. 

Customer contracts add stability

Cargojet’s fundamentals remain strong, despite facing near-term headwinds from lower volumes. It’s worth highlighting that Cargojet’s 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.

Bottom line 

Investors should note that Cargojet is a dominant player in Canada’s 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. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor 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 Fool’s board of directors. The Motley Fool has positions in and recommends Cargojet. The Motley Fool recommends Amazon. The Motley Fool has a disclosure policy.

More on Investing

Canada national flag waving in wind on clear day
Tech Stocks

Trump Trade: Canadian Stocks to Watch

With Trump returning to the presidency, there are some sectors that could boom in Canada, and others to watch. But…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Investing

Is Canadian National Railway Worth Buying for its 2.2% Dividend Yield?

Let's dive into whether Canadian National Railway (TSX:CNR) is a top buy for long-term investors at this point in the…

Read more »

nuclear power plant
Energy Stocks

Is Cameco Stock Still a Buy?

Cameco stock recently reported earnings that showed the Westinghouse investment is creating some major costs. But that could change.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

Start line on the highway
Investing

2 No-Brainer Growth Stocks to Buy Now With $5,000 and Hold Long Term

Market conditions today are ideal for growth investing, and two rising stocks are no-brainer buys in November.

Read more »