The aviation sector is witnessing a challenging period amid the decline in passenger demand due to the pandemic-infused travel restrictions. The decline in top line, rising debt, and a higher rate of cash burn have led many airline companies to lose a significant chunk of their value this year.
However, the surge in e-commerce and healthcare volumes have increased the demand for air cargo services, driving the stock prices of air cargo companies, such as Cargojet (TSX:CJT), higher.
So far, this year, Cargojet has delivered over 57% of returns. Meanwhile, the company has been a consistent performer over the last five years, with its stock price increasing by over 770%. Let’s look at its performance in the recent quarter.
Stellar second-quarter performance
Cargojet posted an impressive second-quarter performance with its revenue rising by 64.7%, while its adjusted EBITDA increased close to 143%. The growth in revenue from all its three segments, domestic air cargo, ACMI (aircraft, crew, maintenance, and insurance), and charter drove the company’s revenue.
The revenue from its domestic air cargo service, which connects 14 major cities in Canada, increased 7.1% due to an increase in e-commerce volumes. However, the decline in business-to-business volumes due to the pandemic-infused lockdown offsets some of the segment’s volume growth.
For the quarter, the ACMI segment reported year-over-year growth of 107%. The addition of new scheduled routes in the last four quarters, which include the route between the USA and Mexico and the two routes to Europe, contributed to the segment’s revenue growth.
Meanwhile, the charter segment posted impressive revenue growth of over 975% during the quarter. Amid the pandemic, the federal and some provincial governments of Canada had chartered aircraft to fly PPEs and other medical supplies from China, driving the segment’s revenue.
Along with top-line growth, the expansion of its gross margin drove the company’s adjusted EBITDA. For the quarter, the company generated adjusted free cash flows of $55.7 million compared to $9.1 million in the corresponding quarter of the previous year.
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Currently, e-commerce sales still form a smaller percentage of Canada’s overall retail sales, indicating a strong growth potential. The pandemic has accelerated the digitization process with not only large retailers but SMBs (small- and medium-scale businesses) also have taken their shops online. This structural shift could increase the need for Cargojet’s services, thus driving its financials.
An array of 26 aircraft and its unique overnight delivery provides Cargojet a competitive edge. Meanwhile, the majority of its customers have signed long-term contracts with guaranteed space and weight allocation on the company’s network.
The company sells the remaining capacity to non-contracted customers on a need basis. So, the company’s earnings and cash flows are stable.
Also, the air cargo business is highly capital intensive, which provides a natural barrier for new entrants, thus preventing increased competition.
In the last few days, Cargojet’s stock price has witnessed some correction due to the weakness in the broader equity markets. Currently, the company trades close to 17% lower from its 52-week high of $195.44. The decline in its stock price has also lowered its valuation multiples.
As of September 8, the company was trading at a forward price-to-earnings multiple of 38.9 and a forward enterprise value-to-EBITDA multiple of 13.2. Although its valuation looks expensive, the company’s high sales growth prospects and expanding margins justifies that.
So, I believe investors with a long-term horizon should utilize this pullback to accumulate the stock for higher returns.
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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.
The Motley Fool owns shares of and recommends CARGOJET INC. Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned.