On today’s TSX Breakouts report, there are 29 stocks on the positive breakouts list (stocks with positive price momentum), and eight securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. The stock has delivered attractive double-digit gains to investors over the last few years. A tailwind, or key driver, for the company is continued e-commerce growth as companies such as online retail giant Amazon expands its operations. The security highlighted today is Cargojet Inc. (CJT-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Mississauga-based Cargojet has three key business segments. Its main business (core overnight) provides time sensitive air cargo services, transporting over 1.3-million pounds of cargo each business day with routes operating between 14 major Canadian cities. There are high barriers to entry in this industry, sheltering the company from competitive pressures. In the first quarter, this business segment represented 55 per cent of total revenues. The company is a market leader in this category, providing over 90 per cent of Canada’s overnight air cargo services. The two smaller sources of revenue include providing planes to customers on a charter basis. In addition, the company generates revenue by providing air cargo services on international routes. There is seasonality in the company’s operations with the fourth-quarter typically the strongest due to high shipment volumes occurring during the holiday season. Also positive is its contract with pilots that remains in place until 2023, in which Cargojet has a no-strike clause.
On May 6, the company reported its first-quarter financial results that nearly matched the Street’s expectations. The company reported revenue of $110.4-million, in-line with the consensus estimate of $111-million. Core overnight revenues increased 9 per cent year-over-year to $61.1-million driven by higher volumes and prices. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $32.3-million, a snick above the consensus estimate of $31-million. Average volume per operating day increased 2 per cent year-over-year. Average cargo revenue per operating day jumped 14 per cent year-over-year.
The company has a well-known customer base. During the first quarter, the top three customers accounted for 61 per cent of the company’s total revenues. Under a Master Services Agreement, the company provides air cargo services for Canada Post and Purolator that extends until March 31, 2025. The company also provides air cargo services for Amazon and United Parcel Service Canada (UPS). The majority of the company’s customers pre-purchase space and weight capacity. In addition, the company is able to pass higher fuel costs on to its customers.
Cargojet stands to benefit from continued e-commerce growth, particularly as Amazon expands its footprint in Canada. Last December, Amazon opened a new office in downtown Toronto and announced its plans to add several new fulfillment centres nationwide in cities such as Edmonton and Ottawa. Furthermore, last month, Amazon expanded its free same-day delivery to Amazon Prime members (with a minimum order size received by a certain time) in Calgary, and now provides this same-day delivery service in three Canadian cities, including Toronto and Vancouver. Free one-day delivery service is available to Prime members placing a minimum eligible order (valued at over $25 and received by a certain time) in 19 Canadian cities.
In March, the company was added to the S&P/TSX composite index, increasing the stock’s visibility.
Dividend policy
The company pays its shareholders a quarterly dividend of 23.4 cents per share or 93.6 cents per share on a yearly basis. This equates to an annualized dividend yield of 1.08 per cent.
In Feb., the company announced a 10 per cent increase to its quarterly dividend, lifting the dividend to its current level of 23.4 cents per share from 21.2 cents per share. The company has announced a dividend increase in each calendar year since 2016.
Analysts’ recommendations
There are nine analysts that cover this small-cap industrials stock with a market capitalization of $1.17-billion, of which eight analysts have buy recommendations and one analyst (Cameron Doerksen at National Bank Financial) has a ‘sector perform’ recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: Acumen Capital, Beacon Securities, Canaccord Genuity, CIBC Capital Markets, Cormark Securities, Echelon Wealth Partners, Laurentian Bank Securities, National Bank Financial, and RBC Capital Markets.
Revised recommendations
Earlier this month, David Ocampo, the analyst at Cormark Securities, initiated coverage on the stock with a ‘buy’ recommendation and target price of $105.
In May, Cameron Doerksen, the analyst at National Bank Financial, trimmed his target price to $82 from $87.
Financial forecasts
Analysts are forecasting earnings growth for the company. The consensus revenue estimates are $497-million in 2019 and $536-million in 2020. The Street is forecasting EBITDA of $148-million in 2019 and $165-million in 2020.
Earnings forecasts have been quite stable - rising slightly. For instance, three months ago, the consensus revenue estimates were $494-million for 2019 and $527-million for 2020. The consensus EBITDA estimates were $143-million in 2019 and $160-million in 2020.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 10.9 times the 2020 consensus estimate. This is above the three-year historical average multiple of 9.3 times but below its peak multiple of 12 times during this period.
The average one-year target price is $100, implying the stock price may appreciate 15.5 per cent over the next 12 months. Individual target prices are as a follows in numerical order: $82 (the low on the Street is from Cameron Doerksen, the analyst at National Bank Financial), $90, two at $95, $98, $100, two at $105 and $120 (the high on the Street is from Gianluca Tucci, the analyst at Echelon Wealth Partners).
Insider transaction activity
Year-to-date, only one insider has been active in the public market.
On June 27, executive vice-president and chief commercial officer Jamie Porteous sold 3,500 shares at a price per share of $81.87 for an account in which he has indirect ownership (The Porteous Family Trust), trimming this account’s holdings to 49,707 shares. Gross proceeds totaled over $286,000.
In a very small transaction, on March 28, Mr. Porteous sold 220 shares at a price per share of $78.129 for an account in which he has indirect ownership.
Chart watch
The stock has been in an uptrend since 2016 and is less than 1 per cent away from its record closing high of $87.32 reached in October 2018. Year-to-date, the stock price is up 22 per cent. In 2017 and 2018, the stock price rallied 28 per cent and 21 per cent, respectfully. In 2016, the share price soared 77 per cent.
In terms of key resistance and support levels, the stock price has initial overhead resistance between $87 and $90, and after that around $100. On a pullback, there is technical support around $80, near its 200-day moving average (at $79.53). Failing that, there is support around $70.
Liquidity is low for this stock, which can increase volatility in the share price. The three-month historical daily average trading volume is just over 70,000 shares.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty