On today’s TSX Breakouts report, there are seven stocks on the positive breakouts list (stocks with positive price momentum), while no securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list with its share price soaring to a record high.
A tailwind, or key driver, for the company is e-commerce growth as consumers in lockdown shift their shopping behaviours to online purchases. Consequently, the company is delivering solid earnings growth - a trend that is anticipated to continue.
That being said, the stock is trading at a lofty valuation relative to its historical levels. Year-to-date, the share price is up over 46 per cent.
With the current volatile trading environment, investors do not need to chase the stock but can wait for an opportunity to buy the stock on market weakness. 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 when conducting your own due diligence.
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 major Canadian cities.
There are high barriers to entry in this industry, sheltering the company from competitive pressures. Last quarter, this business segment represented 54 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. Charter demand is strong and the company has a fleet of 26 airplanes to meet the rising demand. 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.
On May 7, the company reported its first-quarter financial results. Revenues came in at $123-million, up 11 per cent year-over-year, and ahead of the consensus estimate of $119-million. Core overnight revenues increased 9 per cent year-over-year to $66.3-million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $40-million, slightly above the consensus estimate of $39-million, and up 24.5 per cent year-over-year. Average volume per operating day increased 5.5 per cent year-over-year. Average cargo revenue per operating day climbed 9 per cent year-over-year.
The company has an established customer base. During the first quarter, the top three customers accounted for 60 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).
Most of the company’s customers pre-purchase space and weight capacity with approximately 75 per cent of domestic revenue under long-term contracts. Stipulated in these contracts are minimum volumes as well as inflation-based annual price increases. Furthermore, the company is able to pass higher fuel costs on to its customers. The company’s contract with its pilots remains in place until 2026, in which Cargojet has a no-strike clause so that its services should not be disrupted.
COVID-19 has increased demand for Cargojet’s services with rising e-commerce growth and higher charter demand.
On the first-quarter earnings call held on May 7, president and chief executive officer Ajay Virmani remarked on the expected continued strength in e-commerce sales. “We are about 7 per cent to 8 per cent of total retail sales prior to COVID on e-commerce, and the rest was all still traditional sales. I can tell you that talking to many customers, everybody feels that this will certainly enhance and speed up [with] Canada catching up to U.S., where 15 per cent or 16 per cent of the sales are on e-commerce, and in Europe and Asia, over 20 per cent. So we see that this trend will continue on. As a matter of fact, more Canadians are going to be buying online and I think many people that we have talked to have told us that they are now so used to buying at home, sitting [at] home for the past six weeks, they have had a taste of this and they really like it. So we think this would enhance and get us closer to what the U.S. and worldwide percentages are for e-commerce.” He added, “So in the short-term and in the medium-term, it certainly looks like the demand for both the e-commerce and the domestic side, and also the international charters is not slowing down.”
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 a current annualized dividend yield of 0.6 per cent.
The company has maintained its dividend at this level since early 2019.
There are 12 analysts that cover this small-cap industrials stock with a market capitalization of $2.3-billion, of which five analysts have buy recommendations and seven analysts have neutral recommendations.
The firms providing research coverage on the company are: Acumen Capital, AltaCorp Capital, Beacon Securities, Canaccord Genuity, CIBC World Markets, Cormark Securities, Echelon Wealth Partners, Laurentian Bank Securities, National Bank Financial, Raymond James, RBC Dominion Securities, and Scotia Capital.
Last month, multiple analysts increased their target prices including:
- RBC’s Walter Spracklin to $157 from $132.
- Canaccord’s Doug Taylor to $130 from $120.
- National Bank’s Cameron Doerksen to $131 from $118.
- Acumen’s Nick Corcoran to $150 from $125.
- AltaCorp’s Chris Murray by $30 to $150.
- Beacon’s Ahmad Shaath to a Street-high $165 from $130
- Cormark’s David Ocampo by $15 to $145 but reduced his recommendation to ‘market perform’ from a ‘buy’.
Analysts are forecasting solid earnings growth for the company.
The consensus revenue estimates are $521-million in 2020, $556-million in 2021, and $602-million in 2022. The Street is forecasting EBITDA of $183-million in 2020, $199-million in 2021, and $222-million in 2022. The consensus earnings per share estimates are $1.87 in 2020, $2.93 in 2021, rising to $3.48 in 2022.
Earnings expectations have been rising. For instance, three months ago, the consensus EBITDA estimates were $173-million for 2020 and $193-million for 2020. The consensus earnings per share estimates were $1.76 for 2020 and $2.59 for 2021.
The stock is not cheap and is trading at a lofty multiple relative to its historical levels.
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 15 times the 2021 consensus estimate. Looking back over the past five years, this is highest multiple that the stock has traded at, and well above the three-year historical average multiple of 10.6 times.
The average one-year target price is $141, implying the stock is fully valued.
Individual target prices that were updated in May (after the company released its quarterly earnings results) are as a follows in numerical order: $120 (from Ben Cherniavsky of Raymond James), $125, $130, $131, $145, three at $150, $157, and $165 (from Beacon’s Admad Shaath).
Insider transaction activity
Year-to-date, only one insider has reported trading activity in the public market.
On May 15, Paul Rinaldo, senior vice-president – maintenance and engineering, sold a total of 4,427 shares for two accounts at an average price per share of approximately $135.18.
On Friday, the share price rallied 5 per cent, closing at a record high on unusually high volume. That day, over 434,000 shares traded, well above the three-month historical daily average trading volume of roughly 140,000 shares.
Year-to-date, the share price is up over 46 per cent.
In terms of key resistance and support levels, the stock price has overhead resistance around $160. On a pullback, there is technical support around $130, near its 50-day moving average (at $129.08). Failing that, there is support around $120.
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 indexes 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.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.