CIBCEQUITY RESEARCH
February 3, 2023 Company Update
CARGOJET INC.
Laying Out Our Positive Thesis And Addressing Key Concerns
Our Conclusion
In this report, we lay out our positive thesis on CJT and address key
concerns we often hear on the name. CJT’s current share price reflects both
trough-like earnings and trough valuation. We also are optimistic that the
freight cycle finds a floor in H1/23 with a more favourable backdrop in H2/23
as inventory levels should have normalized. We remain positive on CJT, and
it is our preferred name to play the recovery in the freight cycle. CJT is rated
Outperformer with a $196 price target.
Key Points
Trading Like An E-commerce Stock – Overly Punitive, In Our View:
CJT’s share price is down 51% from its highs and is essentially back to
where it was three years ago prior to the pandemic. The main concern that
has hit the stock is the view that it over-earned during the pandemic and
faces a significant headwind as consumer spending normalizes. While this
narrative has hit a lot of consumer-oriented freight transportation names,
CJT’s relative underperformance over the past three years is telling. It has
traded down like major e-commerce companies, whereas consumer-oriented
freight companies are still comfortably trading above pre-pandemic levels.
Recent Volume Trends Suggest A More Resilient Business Model: While
CJT’s business model is not immune to a slowdown, it appears that its flight
activities are holding in better than the broader market. In December, CJT’s
flight activity was up 7% Y/Y and January’s flight activity was up 5% Y/Y.
CJT’s growth trends have slowed but it is not exhibiting a significant reversal.
Valuation – CJT Trading Like A Trucker: CJT is now trading like a trucking
stock. While we recognize there could be some downside risk to 2023E
estimates, we would argue this is the case for the broader freight space. For
CJT, 8x forward EBITDA has been a good floor level. In other words, CJT’s
current share price reflects both trough-like earnings and trough valuation.
Not only is CJT trading at trough valuation, but it is also trading at nearly two
standard deviations below the average EV-to-forward-EBITDA spread versus
the S&P Trucking Index.
Is CJT’s Long-term Growth Strategy Risky? We view the risks around
CJT's fleet growth plan as manageable, given the plan is underwritten by the
DHL contract and there is some capex flexibility. On the former, we highlight
that the opportunity with DHL is not based on continued outsized growth in
air cargo volumes, but on a structural shift in the company's strategy toward
using more dedicated aircraft. This reduces the risk for CJT.
A More Defensive Freight Name: We view CJT as a more defensive freight
name with an underappreciated competitive moat. As the freight cycle
recovers, we see significant upside potential. We view the risk/reward set-up
for CJT as compelling at current levels.