E-commerce Expansion Will Empower Air Cargo Networks Worldwide

Key Takeaways

• Cargojet's first-mover advantage and exclusive long-term partnerships with global clients uniquely position it to benefit from shifting trade routes and e-commerce growth.
  
• Operational efficiency, a technology-driven culture, and a strengthened network are expected to boost margins, diminish cyclicality, and drive sustained market share gains.
  
• Exposure to regulatory, customer concentration, capital cost, and competitive risks threatens Cargojet's revenue stability, margin strength, and future growth prospects.

Catalysts

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

• Analyst consensus expects steady growth from supply chain decoupling and new trade routes, but this notably underestimates Cargojet's outsize first-mover advantage and "first in, last out" status with global clients like DHL and Amazon, positioning the company to capture an even larger share of the accelerating volume shift in trans-Pacific and trans-continental air cargo, supporting substantial revenue and earnings upside as trade realigns.
  
• While consensus expects Canadian e-commerce penetration to drive demand, the current surge in broad-based online retail across all customer segments-combined with Cargojet's enhanced network and deep multi-year strategic relationships-is likely to catalyze sustained double-digit domestic revenue growth and lift long-term EBITDA margins as freight volumes grow faster than analysts anticipate.
  
• Cargojet's leadership in operational efficiency and new technology adoption, including a transformative "work smarter" culture and an ambitious technology modernization project, is expected to drive a structural reduction in unit costs and unlock higher net margins, outpacing industry peers and powering outsized earnings expansion.
  
• The extension and early renewal of exclusive partnerships with Amazon and DHL-now running as long as twelve years and built around incentivized growth frameworks-provide an unprecedented runway for guaranteed minimum volumes and contract escalators, sharply reducing revenue cyclicality while creating opportunities for margin accretion and enhanced return on invested capital as volumes scale.
  
• As independent air cargo carriers benefit from growing constraints on passenger belly capacity and rising demand for next-day and time-definite delivery in e-commerce, healthcare, and perishables, Cargojet's unmatched Canadian network and newly optimized fleet are set to support both durable pricing power and recurrent market share gains, driving robust free cash flow and long-term shareholder value.

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 14.2% today to 12.6% in 3 years time.
• The bullish analysts expect earnings to reach CA$147.3 million (and earnings per share of CA$9.68) by about August 2028, up from CA$145.7 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 18.6x on those 2028 earnings, up from 11.7x today. This future PE is greater than the current PE for the CA Logistics industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 6.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Cargojet Future Earnings Per Share Growth

Risks

• The acceleration of global decarbonization and a growing focus on carbon pricing by governments and shippers could force Cargojet to incur higher compliance and operational costs, which may erode its net margins and make air cargo less competitive versus other modes.
  
• Cargojet's heavy dependence on a limited number of major customers, notably Amazon and DHL, exposes it to significant contract renewal and concentration risk; the loss or reduced volume from any large partner could swiftly impact revenue and adjusted EBITDA.
  
• The persistent rise in interest rates and tightening of capital markets could make fleet renewal and infrastructure investment more expensive for Cargojet, pressuring free cash flow and potentially limiting growth in earnings.
  
• The increasing trend of vertical integration among large e-commerce players such as Amazon, who continue to build out their own logistics networks, threatens to shrink Cargojet's addressable market and jeopardize future revenue growth.
  
• Modal shift trends due to sustainability and cost concerns, as well as technological advancements like autonomous ground vehicles or alternative transport modes, present a growing risk that could drive down overall air freight demand and negatively affect Cargojet's long-term revenue trajectory.

Valuation

• The assumed bullish price target for Cargojet is CA$170.0, 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$170.0, and the most bearish reporting a price target of just CA$98.0.
  
• 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$147.3 million, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of CA$104.01, the bullish analyst price target of CA$170.0 is 38.8% 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.