Airlines across the world have been hit hard by the coronavirus pandemic. A combination of travel bans, closed borders, and other restrictions have crushed tourism and business travel. That has weighed heavily on most carriers. Air Canada, after experiencing sharp losses in March 2020, has gained a modest 12% over the last month, while the largest U.S. carrier by revenue, Delta Airlines, is down by a 18%. One airline that has delivered a sterling performance for shareholders is Cargojet (TSX:CJT). Air freight carrier is up by a stunning 50%, despite the coronavirus pandemic and related economic fallout. There is every indication that Cargojet will soar higher.
Cargojet is Canada’s leading freight dedicated airline. It services 23 cities, 16 major airports, and acts as an important international freight linkage between the U.S. and Canada. Cargojet is responsible for around 90% of Canada’s overnight freight capacity.
The coronavirus pandemic, which has seen governments restrict movement, is boosting demand for freight services, particularly overnight transport. Rising demand for medical products is part of this, but social distancing and the closure of non-essential services has caused the popularity of online shopping and internet sales to soar.
Amazon.com reported for March 2020 alone that it had 2.5 billion visitors to its website, which is a whopping 65% higher compared to a year earlier. According to media reports, the e-commerce giant has seen its global sales surge to US$11,000 a second and is scrambling to hire employees to meet demand.
Amazon’s online grocery sales are surging. That has been one of the hardest segments for the e-commerce behemoth to crack. Even in a post-coronavirus world, it is unlikely consumers will return in droves to traditional brick-and-mortar grocery retailers. There is growing speculation among analysts that the coronavirus pandemic is the tipping point for Amazon and other internet vendors seeking to bolster online grocery sales.
The rapid expansion of internet retailing bodes well for greater demand for Cargojet’s freight services. This bodes well for strong earnings growth, regardless of the coronavirus pandemic and related economic fallout.
Compared to many other airlines, including Air Canada, Cargojet is will easily weather the harsh economic environment that currently exists. It finished 2019 with $1.6 million in cash and long-term debt of $244 million. Cargojet’s debt is manageable, as underscored by it being a conservative 1.5 times EBITDA. Strong earnings growth, for the reasons discussed, will see that multiple fall even lower as 2020 progresses.
The long-term debt is a revolving credit facility, which doesn’t fall due until 2024 and has a total limit of $400 million. That means there is an additional $156 million of credit available boosting Cargojet’s liquidity.
Importantly, there is considerable certainty attached to Cargojet’s earnings. Around 75% of the freight carrier’s domestic revenues are under long-term contracts. As the only major overnight Canadian freight carrier, it is the only option for many delivery services and online retailers for the growing carriage of goods for delivery.
Cargojet is one of the few companies that will experience solid earnings growth in the highly uncertain environment. The closure of non-essential services, social distancing, and restrictions on movement have all triggered a surge in online sales. That will spark greater demand for Cargojet’s freight services. The rapid expansion of e-commerce and internet retailing will act as a powerful long-term tailwind for the carrier.
For these reasons, Cargojet stock will rally higher over the remainder of 2020, making now the time to buy.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Matt Smith has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and CARGOJET INC and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon.