Better Airline Buy: Air Canada vs CargoJet

Air Canada (TSX:AC) and Cargojet (TSX:CJT) are two of Canada’s main airline stocks. Which is better?

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Air Canada (TSX:AC) and CargoJet (TSX:CJT) are two of the main Canadian airline stocks that investors can buy directly. Both stocks are directly listed on Canadian stock exchanges. Porter is privately owned, while the formerly public WestJet is now part of Onex Corp. That leaves AC and CJT as the two main ways to get exposure to the Canadian aviation sector.

As it turns out, AC and CJT are two very different takes on the aviation business model. Air Canada is primarily a passenger airline transporting Canadians all around Canada and the world. Cargojet is, as the name implies, a cargo airline, primarily transporting small packages originating from e-commerce companies. In this article, I will explore the two companies side by side, so you can decide which is the best fit for your portfolio.

Valuation favours Air Canada

Air Canada is a far cheaper stock than Cargojet is. As you can see in the table below, it has lower price-to-sales (P/S), price-to-earnings (P/E), and price-to-book (P/B) ratios than CJT. If you were buying stocks based on cheapness alone, you’d favour Air Canada over CJT.

Air CanadaCargojet
P/E349
Price/sales0.32.2
Price/book92.3
Price/cash flow1.58.8
Air Canada vs. Cargojet: valuation

If you exclude Air Canada’s P/B as an outlier, then it is much cheaper than Cargojet’s. In fact, even with AC’s very high P/B ratio in the picture, it has lower multiples than CJT, although that metric is extremely high mainly because of debt that the company is in the process of paying off. In this author’s opinion, it ought to be excluded.

Cargojet has more long-term growth

Cargojet has more long-term growth than Air Canada does. I put “long term” in italics because the current year’s trend actually favours Air Canada: its revenue and earnings are up, while CJT’s are down. But the long-term trend is in CJT’s favour, as the table below shows.

Five-year compounded growth (CAGR) metricAir CanadaCargojet
Revenue3.8%13.7%
Earnings20.5%13.9%
Assets1.8%16.2%
Book value5.4%47%
Air Canada vs Cargojet: growth

As you can see, Air Canada takes the cake on earnings per share growth, but Cargojet wins on every other one. On the whole, I’d call this a victory for Cargojet.

Air Canada is more profitable

Last but not least, we have profitability. Air Canada is very profitable this year, with a 9.9% net margin, 8.8% free cash flow margin, and 34% gross profit margin. Cargojet on the other hand has a 4.5% net margin, 5.5% free cash flow margin, and 16% gross profit margin. These metrics all favour Air Canada. AC also technically has a higher return on equity than Cargojet does – a whopping 300%! – but that’s largely because of the company’s tiny amount of book value. It doesn’t really indicate massive profitability in this case.

Final verdict: Air Canada by a hair

Taking everything into account, Air Canada seems preferable to Cargojet. It is cheaper and far more profitable than that company is. CJT does take the case on long-term growth, but even that reversed in the last year. So I’d be more comfortable owning AC than CJT.

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 Andrew Button 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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