What’s Next for Cargojet Stock (After Earnings)?

After reporting its fourth-quarter earnings, Cargojet’s stock fell over 10%. So, should you start accumulating the stock after the sell-off?

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Cargojet (TSX:CJT) reported its fourth-quarter performance yesterday. The company’s topline grew by 13.2%. However, its adjusted EPS (earnings per share) fell by 63.7% amid rising expenses. Further, the company’s management has provided a softer outlook amid falling consumer spending due to inflationary pressure. To conserve capital, the company announced the sale of two of its Boeing 777-300 aircraft and has postponed other modifications.

The increase in net losses and softer outlook appear to have made investors nervous, as the company lost over 10% of its stock value yesterday. After yesterday’s sell-off, the company trades at around a 55% discount from its all-time high. So, should investors look to accumulate the stock after the recent steep correction? Let’s look at its fourth-quarter performance in more detail.

Cargojet’s fourth-quarter performance

Cargojet’s revenue came in at $267 million for the December-ending quarter, representing 13.2% growth from its previous year’s quarter. The increase in its revenue from ACMI (aircraft, crew, maintenance, and insurance), charter services, and higher fuel surcharges drove its top line. However, its domestic network sales declined by $0.9 million, partially offsetting its revenue growth.

Despite the topline growth, the company’s adjusted net income declined by 64% to $15.5 million. Higher direct costs and increased SG&M (selling, general, and marketing) expenses lowered its net income. The surge in fuel expenses and higher depreciation, maintenance, amortization, crew, and insurance costs increased its direct costs. Further, the company’s SG&M expenditures rose by 115% due to higher wages, benefits, and pensions and increased audit, legal, and consulting expenses.

Meanwhile, the company’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) fell by 8.4% due to lower domestic network revenues amid decreased volumes. Now, let’s look at its outlook.

Cargojet’s outlook

With inflation hurting consumers’ pockets, Cargojet expects a slowdown in consumer spending in the coming quarters. So, it has deferred capital expenditure on four 777-200 and two 767-200 aircraft designated for general growth. The deferral in capital expenditure should strengthen the company’s balance sheet. Meanwhile, the company will continue purchasing four 757-200 and three 767-300 aircraft this year, with long-term contracts securing them.

Although the near-term outlook for the company looks gloomy, its long-term growth prospects look healthy. With inflation showing signs of weakening and resilient economic growth, I expect the growth in consumer spending to return in the medium term, thus driving the demand for air cargo services. Meanwhile, Cargojet’s management expects the increase in the need for air cargo services to exceed the global freighter fleet growth in the coming years, thus benefiting the company. Besides, the company is working on introducing cost control initiatives, which could improve its profitability in the coming quarter.

Investor takeaway

The recent sell-off has dragged Cargojet’s valuation down, with its NTM (next 12 months) price-to-sales multiple and NTM price-to-earnings multiple standing at 1.9 and 15.8, respectively. It also pays a quarterly dividend of $0.286, with its yield for the next 12 months at 1%.

With consumer spending declining, I expect Cargojet to remain volatile in the near term. However, given its unique overnight delivery service to 16 prominent Canadian cities and long-term growth prospects, long-term investors should start accumulating the stock at these discounted levels to earn superior returns in the long run.

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 Rajiv Nanjapla has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cargojet. The Motley Fool has a disclosure policy.

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