RBCAhead of earnings season for Canadian transportation companies, RBC Dominion Securities analyst Walter Spracklin sees “increasing likelihood of a freight recession.” “Canadian economic activity expanded in March posting its highest level since the [PMI] survey was launched,” he said. “We attribute this to a reopening of the Canadian economy post COVID-19. On the other hand, U truck pricing and freight volumes are beginning to slide, which suggests a potential slow-down in freight activity and which would represent a headwind to revenues at the freight transportation companies in our coverage. While data is mixed, we are taking a more pessimistic view, and increasingly expect consumer spend to shift away from goods and into services, thereby potentially impacting freight volumes at the companies within our coverage.”
Mr. Spracklin reaffirmed Cargojet Inc. as his “top name in transportation,” maintaining an “outperform” recommendation and his Street-high $302 target (versus the $242.83 average).
“Following successive quarters of strong operating results for CJT, investors remain cautious around the long-term supply situation for air cargo when passenger aircraft return and therefore the capacity risk associated with CJT’s fleet expansion,” he said. “Key however is a recently announced strategic agreement with DHL (5-year term + 2 year renewal option), which we view as reducing the risk associated with the fleet expansion. The DHL deal commits 13 of CJT’s 19 aircraft and therefore leaves two 767′s and four 777′s for additional growth and diversification, in addition to improved asset utilization that can be deployed for further growth on its existing fleet. Based on our 5-year valuation framework, we see implied upside of more than 80 per cent at current prices. CJT remains our top name in Transportation.”