Shares of Cargojet (TSX: CJT) fell 10.8% following its fourth-quarter financial results. The company that offers time-sensitive premium air cargo services in North America missed Street’s earnings forecast, which didn’t sit well with the investors.
Cargojet’s revenue of $267 million increased 13.2% year over year and came ahead of the analysts’ expectation of $259.8 million. However, its adjusted earnings of $0.90 per share fell short of Wall Street’s consensus estimate of $1.96.
The company’s management blamed COVID-era extra costs and lower-than-expected volumes in November and December for the pressure on margins. However, this pressure on margins is transitory, and management has already taken cost-control initiatives, which will likely cushion its margins in the coming quarters. Meanwhile, this pullback in Cargojet stock is an excellent opportunity for investors to buy and hold its stock for the long term. Let’s look at factors that support my bull case.
Strategic partnerships to drive strong growth
While near-term pressure on consumer spending will likely hurt volumes, the company has significant strategic partnerships with leading businesses that ensure stability and growth and diversify its revenue base.
For instance, Cargojet has strategic partnerships with the largest logistics brands like Purolator, UPS, DHL, Canada Post, Amazon, DHL, Andlauer Healthcare Group, and TFI International. The company offers ACMI (Aircraft, Crew, Maintenance and Insurance), charter, and aircraft dry lease services to these partners, which augurs well for its growth by meaningfully driving its earnings and cash flows. Most importantly, it diversifies its revenue base, which is positive.
Earlier this year, Cargojet announced the extension of its contract with Canada Post and Purolator. Moreover, the company said during the Q4 (fourth-quarter) conference call that it extended the contracts with all of its strategic customers well ahead of their contractual termination date till 2027 and beyond.
This shows the resilience of its business and value proposition. Further, it solidifies its leadership position in the Canadian overnight market.
Fundamentals remain intact
While Cargojet’s strategic partnerships are key to its growth, its robust fundamentals further support my bullish outlook. Its next-day delivery capability to over 90% of the Canadian population is a strong competitive advantage that supports its growth.
Impressively, its long-term contracts with customers are supported by minimum revenue guarantee and cost pass-through provisions. Also, a 100% customer retention rate, network and fleet optimization, and barriers to entry augur well for growth.
Thanks to its solid domestic network and growing e-commerce penetration rate, Cargojet is well positioned to capitalize on the fulfillment requirement of e-commerce companies.
Bottom line
Cargo has a market cap of $1.89 billion, while its stock has delivered stellar returns in the past. Notably, Cargojet stock has increased at a CAGR of approximately 31% in the past decade, outperforming the TSX by a significant margin.
Its strong fundamentals, revenue diversification, opportunities in the international market, cost-cutting initiatives, and strategic partnerships position it well to deliver outsized returns. Further, its strong balance sheet and low-leverage profile are positives.
Cargojet stock is trading at a forward price-to-earnings multiple of 17.5, which is much lower than its historical average of 32.7, providing a solid buying opportunity near the current levels.
