Our view: CJT reported a quarter that demonstrated outsized revenue growth (+15%) that was tempered by cost pressures in the near term, which limited operating leverage and margin expansion. While the market appears to focus on the cost element, we expect cost inflation to subside in the near-term; while we expect both structural and cyclical growth opportunities to continue (and possibly accelerate). As a result, we see operating leverage as a key opportunity in 2025, making today's share price reaction a significant opportunity. Reiterate CJT as our top idea in Transportation.
Key points:
Q3/24 in line. CJT's EBITDA of $82MM was generally in line with consensus of $84MM (RBC: $89MM). Notable is the level of topline revenue growth being achieved (+15% y/y) despite a freight recession. This however is being offset somewhat by cost pressure, resulting in lower operating leverage (margins only up 76bps y/y). Net net a mixed quarter for CJT in Q3.
We had the opportunity to catch-up with mgmt post the call; highlights from that, together with conference call takeaways below:
• Customer indications suggest a strong peak season in Q4. CJT has enjoyed a solid base line of domestic growth this year (+5% in Q3 y/ y) and has opportunistically allocated capacity to high demand areas, resulting in ACMI growth (+12% y/y) and Charter growth (+60% y/y). This is resulting in a topline trend run rate of 15% growth y/y in Q3; and based on customer ordering into peak season, we are now modelling for continued double digit revenue growth in Q4 (and additional growth in 2025 as the two new aircraft come online). Key is that all of this growth comes amid a freight recession backdrop - and should the economy improve in 2025, this would add a cyclical growth element that would overlay on CJT's strong structural growth trend.
• But costs are a factor. Transportation players are seeing cost pressures and CJT is not immune - and as a result we are increasing our cost assumptions in the near-term. Key is that we believe that the frothy cost environment will subside; however the structural growth opportunities will not - suggesting to us that operating leverage will emerge in 2025 and 2026.
• Adjusting estimates. We are increasing our revenue assumptions, but also increasing our cost assumptions (most notably in the next few quarters). As a result, our Q4/24 EBITDA goes to $87MM (from $92MM). We expect some of these pressures to continue into next year, so our 2025E goes to $370MM (from $375MM) and our 2026E is unchanged at $406MM.
• Valuation remains attractive. Trading at 7.5x our 2025E EBITDA, the shares are trading at a discount on an absolute level; relative to history (range 7.5x to 15.8x), to trucking (TFI and AND at 9.5x); and to rail (CN and CP at 13.5x). CJT represents an exceptional investment opportunity - the best in our coverage universe in our view - and we continue to rate it as our top idea in Transportation.