CIBC ReportEQUITY RESEARCH
May 1, 2023 Earnings Update
CARGOJET INC.
Tough Macro But Acting With A Sense Of Urgency
Our Conclusion
CJT’s Q1 results reflected a softening freight market but this has been well-
telegraphed. We would argue that despite the tough macro, CJT's core
revenue held in well all things considered. In addition, CJT is taking steps to
right-size costs and reduce near-term capex. This also addresses a key
investor concern that CJT faces high decremental margins and fixed capex if
volumes slide. While the outlook for the freight cycle is uncertain, we view
CJT’s current share price as a good entry point. This is the most de-risked
freight name we cover (trough-like multiple on trough-like earnings). We
maintain our Outperformer rating but lower our price target to $180 (from
$193) on our estimate revisions and changes to our pro forma net debt.
Key Points
Tough Macro But We Knew This Already: CJT acknowledged the freight
environment has softened relative to the outlook provided on its Q4 earnings
call. The company noted that it had expected low-single-digit Domestic
revenue growth in Q1 but it came in flattish. This is not overly surprising as
other freight names that have reported Q1 results have called out a weaker
environment exiting the first quarter. Nonetheless, if we take a step back,
CJT’s core revenue did hold in well which highlights the moat around its
business.
Flat Domestic revenue is the slowest growth CJT has seen looking back
eight years, but in this environment, we would argue flat is the new up.
Looking at other major freight bellwethers, Q1 revenue was down 6% Y/Y for
UPS, 10% Y/Y for TFII’s P&C segment, 7% for JBHT, and 4% Y/Y for ODFL.
Within CJT’s ACMI segment, revenue was up 25% Y/Y. The Y/Y increase
was primarily due to new routes to the U.S., South America, Europe and
Asia, and an increase in ad hoc ACMI charter flights. The company sees
some upside to Q2 ACMI revenue on new ad hoc Caribbean and South
American routes which could become permanent. While ACMI revenue is not
immune from the freight slowdown, the contractual nature of this revenue
stream highlights it is significantly more resilient.
Lastly, over the past four quarters, charter revenue has bounced between
$15MM-$20MM, signaling this segment is performing as expected.
We continue to highlight that CJT’s revenue benefits from a higher safety net
given its best-in-class service and long-term customer contracts. And when
the freight cycle does turn, we continue to see a path for CJT to generate
$500MM+ in EBITDA.