Is Cargojet Stock a Buy at Today’s Price?

Given its long-term growth potential and discounted stock price, I am bullish on Cargojet.

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Cargojet (TSX:CJT) offers time-sensitive air cargo services to 16 prominent Canadian cities. It also operates on scheduled international routes for multiple cargo customers and provides its aircraft on an AMCI (Aircraft, Crew, Maintenance, and Insurance) basis. The company’s stock price soared over $250 during the pandemic amid the e-commerce boom. However, with the opening of the economy, the demand for the company’s services declined, dragging its stock price down.

Nonetheless, investors’ interest in the stock has renewed amid the recent announcement of a three-year agreement with Great Vision HK Express, a Chinese-based logistics company. Since the deal announcement on June 10th, the company’s stock price has increased by over 15%. Let’s assess whether the uptrend could continue by looking at the company’s recent performance and growth prospects.

Cargojet’s first-quarter performance

In the March-ending quarter, Cargojet reported revenue of $231.2 million, a slight decline from $231.9 million in the previous year’s quarter. A strong performance from the domestic network, ACMI, and its charter business boosted its topline. However, a decline in fuel and other revenue and increased amortization of stock warrant contract assets more than offset the growth to drag its revenue down.

Despite the decline in its topline, the company’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) and adjusted EPS (earnings per share) grew by 4.5% and 6.6%, respectively. The optimization of its fleet and flight schedules, along with volume growth, led to margin expansion. Its adjusted EBITDA margin increased from 32.3% to 33.9%. Besides, the company generated operating cash flows of $80.3 million during the quarter, representing an increase of 27.3% from the previous year. During the quarter, the company repaid $121.7 million of its long-term debt, thus improving its leverage ratio (net debt-to-adjusted EBITDA) from 2.6 to 2.2.

Cargojet’s growth prospects

Amid time constraints, improving online buying experiences, and growing internet penetration, more customers are choosing digital marketplaces. Expanding e-commerce could drive the demand for air cargo services, thus benefiting Cargojet. Given its unique overnight service and a solid fleet of 40 aircraft, the company is well-positioned to benefit from this market expansion. Besides, the company earns around 75% of its domestic revenue from long-term contracts, stabilizing its financials.

Notably, under its recent agreement with Great Vision HK Express, Cargojet will operate a minimum of three flights per week between Hangzhou, China and Vancouver, B.C. The contract would generate $160 million in revenue over its total duration.

Further, Cargojet is also focusing on streamlining its maintenance processes, optimizing schedules, and ensuring disciplined procurement, which could improve its efficiency and deliver cost savings. Considering all these factors, I believe the company’s growth prospects look healthy.

Investors’ takeaway

Despite the 15% increase in stock price, Cargojet trades around 46% lower than its 2020 high. Its valuation looks reasonable, with its NTM (next 12 months) price-to-sales multiple at 2.2. Further, the company has declared a quarterly dividend of $0.3146/share, with its forward yield at 0.95%.

Scotiabank has raised its price target for Cargojet from $140 to $160 amid the announcement of Cargojet’s deal with Great Vision HK Express. The new price target represents an upside of around 20% from its July 11th closing price. Considering all these factors, I expect the uptrend in Cargojet to continue, thus making it an excellent buy.

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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