An investment in Cargojet Inc. has always been a bet on a long-term trend: As people buy more stuff online, there will be a corresponding need to ship packages across the country.
But the shares of the overnight air cargo business have retreated more than 10 per cent over the past two months. Is the dip worth buying?
Mississauga-based Cargojet operates an air cargo network between 14 Canadian cities, with a few international routes and charter services as well. Its customers include Amazon.com Inc., Canada Post and a number of ground courier companies – and it must compete against major airlines, including Air Canada.
The company is in a good position. It controls a remarkable 90 per cent of the domestic overnight air cargo business in Canada, thanks in part to regulations that put restraints on foreign-owned freight airlines from flying domestic routes. And about 75 per cent of Cargojet’s volume is based on long-term contracts, providing stability.
It is also sitting on attractive growth prospects, given the rise of online shopping globally. In the United States, online sales now account for about 10 per cent of total retail sales, with sales rising at a clip of about 15-per-cent annually, according to Toronto-Dominion Bank. Though Canada lags the global trend, it’s clear where things are going, which underscores demand for Cargojet’s services.
What’s more, a provision in the U.S.-Mexico-Canada Agreement (the renegotiated North American free-trade agreement) will raise the threshold for duties from $20 to $150, potentially spurring more cross-border online shopping.
It adds up to what many analysts believe is a solid secular trend, especially as Amazon.com expands its Prime one-day delivery service in Canada.
“Cargojet continues to capitalize on its near-monopolistic position in the Canadian air cargo market, benefiting from accelerating tailwinds from e-commerce that have been driving double-digit growth,” Ahmad Shaath, an analyst at Beacon Securities, said in a note this week.
The stock’s performance over the longer term supports this view. Over the past five years, Cargojet shares – which were added to the S&P/TSX Composite Index in March – have risen about 270 per cent (not including dividends). That’s nearly 22 times the return of the S&P/TSX over the same period.
There are risks here, of course. While e-commerce will no doubt continue to expand its share of overall retail spending, robust online shopping needs a strong domestic economy. According to the Bank of Canada, though, the economy’s growth is slowing: Last month, the central bank slashed its forecast for growth this year to just 1.2 per cent, from a forecast of 1.7 per cent previously.
Simmering concerns over global trade aren’t helping matters. U.S. President Donald Trump said he is ready to raise tariffs this Friday on US$200-billion worth of Chinese imports, to 25 per cent, citing backpedalling by Chinese trade negotiators during current trade talks between the two countries. The threat has renewed concerns about the global economy.
Cargojet’s customers offer another risk: When they struggle, Cargojet can get hit. This is what happened late last year when a labour dispute at Canada Post slowed parcel deliveries, which continued to weigh on Cargojet’s results into the first quarter: Shipment volumes increased by a mere 2 per cent year-over-year.
No wonder, then, Cargojet’s share price has stalled in recent months. But analysts remain upbeat about the company’s prospects, and their enthusiasm is grounded on impressive quarterly financial numbers. In the first quarter – which follows the busy holiday season – total revenue increased 11.3 per cent and EBITDA (earnings before interest, taxes, depreciation and amortization) surged 17.5 per cent, helped by better pricing.
According to Walter Spracklin, an analyst at RBC Dominion Securities, weaker first-quarter volumes should bounce back to more normalized growth above 7 per cent for the rest of the year.
“First-quarter results tend to be somewhat choppy, being the quarter immediately following peak season. Our discussions with management, however, yielded a very positive outlook for the remainder of the year, which gives us conviction in our remaining quarter estimates for volume and pricing,” Mr. Spracklin said in a note this week.
He expects the shares can trade at $100 within 12 months, implying a potential gain of about 33 per cent. The shares are down over short-term concerns about trade and the global economy – but the outlook for e-commerce is holding up just fine.
David Berman