On today’s Breakouts report, there are 15 stocks on the positive breakouts list (stocks with positive price momentum), and 46 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock whose share price has been consolidating, or trading sideways. As a result, it has not appeared on either the positive or negative breakouts list for quite some time.
However, analysts are bullish on the stock, expecting the share price to jump 43 per cent over the next year. If they are correct, this stock may appear on the positive breakouts list in the future.
That being said, investors may need to be patient in the near-term. The share price may not rally significantly until there is evidence of solid execution of management’s key objectives.
The stock has a unanimous buy recommendation from 12 analysts. The stock is trading at an attractive valuation relative to historical levels with room for multiple expansion. The security highlighted today is Cargojet Inc. (CJT-T).
A brief outline on Cargojet is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Mississauga-based Cargojet has three key business segments. Its largest business (core overnight) provides time sensitive air cargo services, transporting over 25 million pounds of cargo each week with routes operating between 15 major Canadian cities. 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.
Investment thesis
* Proven leadership. Over the years, management has successfully achieved solid revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) growth.
* Industry leader. The company provides over 90 per cent of Canada’s overnight air cargo services.
* High barriers to entry. This shelters the company from competitive pressures.
* Long-term contracts with its customers. 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.
* Top tier customers. The company provides air cargo services for Canada Post, Purolator, e-commerce giant Amazon, and United Parcel Service Canada (UPS). During the first quarter, its top three customers accounted for 63 per cent of the company’s total revenues. On April 1, the company announced that it was expanding its current relationship with Amazon. Cargojet entered into a four-year agreement to operate two Amazon-owned aircrafts starting in mid-2021.
* Contract with its pilots in place until June 2027. No-strike clause incorporated in the contact.
* Reasonable valuation. The stock is trading at a slight discount to its three-year historical average multiple.
* Potential catalysts: 1) International growth. On the earnings call, President and Chief Executive Officer Ajay Virmani said, “We also continue to seek an investment and presence in [the] U.S. market. The growth in the U.S. market is tremendous. There [are] many routes and many areas that we cannot cover with our current license arrangements, and we continue to seek a U.S. partner for our growth strategy across the border as many of our customers in Canada are also customers in U.S” He added, “Our initial thoughts are that we’re going to invest in a small license more than a carrier.” He anticipates this investment to cost between $5-million and $20-milliion. 2) Continued e-commerce growth. For instance, on Amazon’s (AMZN-Q) first quarter earnings call, the chief financial officer stated that, “In North America, revenue growth of 39 per cent largely reflects the continuation of demand trends that we have seen since the early months of the pandemic…Prime members also continued to shop with greater frequency and across more categories than before the pandemic.” 2) Expanding fleet. At the end of the first quarter, the company had 28 aircrafts up from 25 aircrafts during the same period last year. Management plans to expand its fleet to 30 by the end of 2021, and have 33 aircrafts by the end of 2022. The CEO remarked on the earnings call, “We do not anticipate these aircrafts to be sitting idle even for a day.”
* Key risk to be aware of: 1) Decelerating earnings momentum due to the rapid earnings growth experienced in 2020 caused by COVID-19. During the lockdowns, usually high demand for delivered packaged goods and chartered flights caused revenue to spike (along with Cargojet’s share price).
Quarterly earnings
Before the market opened on May 3, the company reported its first-quarter financial results. Revenue came in at $160.3-million, up 30 per cent year-over-year, and ahead of the consensus estimate of $153-million. Adjusted EBITDA was $64.2-million, exceeding the consensus estimate of $58-million, and up 44 per cent year-over-year. Average volume per operating day increased 35 per cent year-over-year. Average cargo revenue per operating day jumped 35 per cent year-over-year. The share price was relatively flat that day, rising 0.5 per cent.
On the earnings call, Mr. Virmani laid out management’s main near-term objectives, “Our biggest focus for the next six to eight months would be strictly managing our costs and the areas that we can find tune in to make sure that the money we spent out there is for the right reasons. … We invested in the fleet expansion…We have also added approximately 60-plus pilots in the past three to four months. ... Certainly, the cost of our crudes has gone up substantially. Some of it is recoverable, and some of it is not.”
The company will be reporting its second quarter financial results before the market opens on Tues. Aug. 3. Management will be hosting a conference call at 8:30 a.m. ET.
Dividend policy
The company pays its shareholders a quarterly dividend of 26 cents per share or $1.04 per share on a yearly basis. This equates to a current annualized dividend yield of 0.6 per cent.
Analysts’ recommendations
There are 12 analysts that actively cover this small-cap industrials stock with a market capitalization of $3.1-billion. All 12 have buy recommendations.
The firms providing recent research coverage on the company are: Acumen Capital, ATB Capital Markets, Beacon Securities, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Cormark Securities, Laurentian Bank Securities, National Bank Financial, RBC Dominion Securities, Scotia Capital and TD Securities.
Revised recommendations
Quarter-to-date, one analyst has revised his target price.
Earlier this month, Canaccord’s Matthew Lee lifted his target price to $230 from $220.
Financial forecasts
Analysts are forecasting continued top line growth for the company.
The consensus revenue estimates are $690-million in 2021, up from $668.5-million reported in 2020, rising to $749-million in 2022. The Street is forecasting EBITDA of $268-million in 2021, down from $291-million reported in 2020, and climbing to $293-million in 2022.
Earnings expectations have been rising modestly. For instance, three months ago, the Street was forecasting revenue of $677-million for 2021 and $735-million for 2022. The consensus EBITDA estimates were $260-million for 2021 and $288-million for 2022.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 11.4 times the 2022 consensus estimate, below its three-year historical average multiple of 12.2 times.
The average one-year target price is $257.83, implying the share price may appreciate 43 per cent over the next 12 months.
Individual target prices are as a follows in numerical order: $225, $226, three at $230, two at $245, $270, $290, $293, $300 and $310 (from Laurentian Bank’s Nishita Mehta).
Insider transaction activity
Last month, two insiders reported selling activity in the public market.
On June 30, Arlene Dickinson, who sits on the board of directors and appears on the TV show Dragon’s Den, divested 1,600 shares at a price per share of $185, trimming this particular’s account’s position to 10,304 shares. Proceeds from the sale totaled $296,000, excluding commission charges.
On June 17, executive vice-president and chief commercial officer Jamie Porteous sold 1,440 shares at price per share of $176.55, leaving 1,152 shares in this specific account. Proceeds from the sale exceeded $254,000, not including trading fees.
Mr. Porteous holds 10,107 shares in a different account for which he has indirect ownership (The Porteous Family Trust).
Chart watch
In 2020, the share price rallied sharply from around $100 at the beginning of the year to a record high of $245.68 on Nov. 5, 2020. Since then, the share price has experienced a 50 per cent retracement. Over recent months, the share price has been trading sideways, largely between $165 and $185.
In terms of key resistance and support levels, the stock price has major overhead resistance around $200, near its 200-day moving average (at $195). Looking at the downside, there is strong technical support around $160.
Please note that this report is not an investment recommendation. 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.
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Jennifer Dowty