Digital Transformation And E-Commerce Will Fuel Air Cargo Demand

Key Takeaways

• Strong e-commerce growth and new shipping models position Cargojet for sustained revenue and margin expansion, potentially surpassing current market expectations.
  
• Long-term contracts and digital transformation initiatives enhance earnings stability and operational efficiency, strengthening competitive advantages regardless of economic conditions.
  
• Exposure to customer concentration, regulatory and environmental pressures, rising industry competition, and disruptive transport technologies threaten long-term profitability and revenue stability.

Catalysts

Provides time-sensitive overnight air cargo services and carries in Canada.

• Analyst consensus expects Cargojet to benefit from increasing e-commerce penetration in Canada, but given the record 16% year-over-year growth in domestic revenues and the structural lag in Canadian online retail versus global peers, the scale and longevity of e-commerce-driven demand could be sharply underestimated, offering the potential for sustained, double-digit revenue growth and strong margin expansion.
  
• Analysts broadly agree that supply chain decoupling will lead to more direct cargo entering Canada from Asia; however, with new shipping models from major e-tailers like Temu and Shein, Cargojet is positioned to capture an outsized share of this redirected volume, accelerating network effects and enhancing overall revenue and earnings power beyond current market expectations.
  
• The company's demonstrated ability to generate record revenues and EBITDA with essentially flat block hours underlines substantial room for yield and margin expansion through enhanced customer mix, higher-value ad hoc charters, and digital pricing optimization.
  
• Cargojet's entrenched commercial agreements with Amazon and Canada Post provide a defensible base of minimum contracted volume that protects cash flow and underpins predictable, long-term earnings durability regardless of economic volatility.
  
• With management's ongoing digital and IT transformation optimizing internal processes and accelerating speed-to-market for new routes, Cargojet is positioned to capture market share as advanced supply chain integration becomes essential, potentially driving step-change improvements in operating efficiency, margins, and return on invested capital.

Cargojet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Cargojet compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Cargojet's revenue will grow by 4.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 12.2% today to 9.3% in 3 years time.
• The bullish analysts expect earnings to reach CA$108.3 million (and earnings per share of CA$7.35) by about July 2028, down from CA$123.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 30.5x on those 2028 earnings, up from 14.2x today. This future PE is greater than the current PE for the CA Logistics industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 3.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Cargojet Future Earnings Per Share Growth

Risks

• The company's need for ongoing fleet modernization, including significant maintenance capital expenditures of $160 million to $180 million this year and plans to replace or reconfigure certain aging aircraft, could restrain free cash flow and profitability over time, especially amid regulatory pressures for more fuel-efficient and lower-emission aircraft.
  
• Heavy customer concentration, particularly with Amazon, Canada Post, and DHL, exposes Cargojet to the risk of renegotiated contracts on less favorable terms or outright contract loss, which would materially impact future revenue streams.
  
• Growing regulatory and public scrutiny on the environmental impact of aviation, including potential carbon pricing or emissions limits, could drive up compliance costs and limit operational flexibility, thereby compressing net margins.
  
• The rise of digitalization and automation across the logistics industry may erode barriers to entry, intensifying price competition and potentially reducing Cargojet's market share and revenue growth as new and larger competitors scale their operations.
  
• Advancements in alternative freight transport modes such as high-speed rail and autonomous trucks, along with the possibility of reshoring or nearshoring of North American supply chains, could structurally reduce demand for transcontinental and international air cargo, undermining both long-term revenue and earnings growth.

Valuation

• The assumed bullish price target for Cargojet is CA$177.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Cargojet's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$177.0, and the most bearish reporting a price target of just CA$95.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CA$1.2 billion, earnings will come to CA$108.3 million, and it would be trading on a PE ratio of 30.5x, assuming you use a discount rate of 7.5%.
• Given the current share price of CA$102.84, the bullish analyst price target of CA$177.0 is 41.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.