Air cargo company Cargojet (TSX:CJT) has delivered solid returns and made its investors rich in the past. Moreover, the company benefitted from unprecedented demand for its timely service during the COVID-19 pandemic.
However, the stock has underperformed the broader markets over the past year and has given up significant value, as the normalization in demand and macro headwinds took a toll on consumer spending for products that travel on Cargojet’s air freight network.
As the company is battling lower volumes and overcapacity amid a weak demand environment, it is focusing on preserving cash. Cargojet is reducing capital expenditures, lowering costs, and sustaining profitability, which is encouraging.
For instance, as volumes fluctuate in an uncertain economic environment, the company is reducing the number of block hours in the domestic network. However, it still maintains an optimum service level. Moreover, its cost management efforts related to overtime, temporary employees, and training have also been adjusted, which will cushion its earnings.
While the company focuses on driving efficiency and preserving cash, its long-term customer contracts add resiliency and position it well to easily navigate the short headwinds.
With this backdrop, let’s consider why this Canadian stock is a buy near the current levels.
Cargojet’s fundamentals remain strong
Cargojet is facing near-term headwinds from lower volumes. However, its fundamentals remain strong. Its long-term customer relationships, supported by minimum volume guarantees and renewal options, add visibility over future revenues. Further, its cost pass-through provisions support its margins and safeguard it in an uncontrollable variable cost environment.
Investors should note that Cargojet is the leading air cargo company in Canada. Moreover, its next-day delivery capability to over 90% of Canadians provides a solid competitive advantage over its peers. Furthermore, its high customer retention rate adds stability. Also, its unique mix of customers and cargo allows for optimizing space and density, and its fuel-efficient fleet supports its margins and growth.
Thanks to its well-established domestic network, the company remains the backbone of all time-sensitive deliveries across Canada, enabling it to maintain its e-commerce leadership. Moreover, Cargojet has diversified its revenue base and provides dedicated aircraft to customers on an ad-hoc and scheduled basis for cargo and passenger charters.
Easing inflation, recovery in e-commerce demand, long-term contracts, focus on new cross-border and international opportunities, and cost-reduction measures will support its growth and led to a rally in its share price.
Cargojet’s strategic partnerships are earnings accretive
While Cargojet’s fundamentals remain strong, its strategic partnerships with the leading logistics brands ensure stability and are earnings accretive. In January 2023, the company extended its agreement with Canada Post and Purolator until September 30, 2029. These extended agreements have minimum guaranteed volumes, allowing Cargojet to continue investing in value-added and enhanced services to accelerate its growth rate.
Last November, Cargojet renewed and extended the agreement with United Parcel Service Canada until 2030.
Investors should note that besides UPS, Canada Post, and Purolator, the company has strategic partnerships with DHL, Amazon, Andlauer Healthcare Group, and TFI International. Moreover, during the fourth-quarter conference call, Cargojet’s management said that the company has extended its contracts with all strategic customers well before their termination date until 2027 and beyond.
These partnerships are important for the company, as they drive revenue and earnings using its other offerings, including the charter, ACMI (Aircraft, Crew, Maintenance and Insurance), and aircraft dry lease services.
Bottom line
Cargojet’s 75% of the domestic revenue is under long-term contracts, adding stability to its business. Moreover, its extensive domestic network, next-day delivery capabilities, strategic partnerships, and international growth opportunities augur well for growth. Meanwhile, Cargojet is trading at a discounted valuation, presenting an excellent opportunity for buying and holding this stock.
