Rising Regulations And Overcapacity Will Crush Core Business

Key Takeaways

• Heavy exposure to changing trade patterns, evolving logistics tech, and concentrated clients threatens long-term demand and earnings stability.
  
• Rising sustainability demands and fleet expansion risk squeezing margins through increased costs and overcapacity.
  
• Long-term contract renewals, fleet optimization, and operational improvements support stable revenue, margin expansion, and position Cargojet for domestic strength and international growth.

Catalysts

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

• Intensifying global efforts to localize supply chains and increase nearshoring may drive a structural, long-term reduction in cross-border and long-haul air cargo demand, which could erode Cargojet's core international business volumes and constrain revenue growth over time.
  
• Increasingly strict carbon emissions regulations and growing environmental scrutiny are likely to force Cargojet to invest heavily in new, low-emission aircraft and green logistics infrastructure; this will elevate capital expenditures and operating costs, compressing net margins and free cash flow, especially as sustainability costs accelerate industry-wide.
  
• The company's continued reliance on a highly concentrated customer base-specifically Amazon and DHL-creates significant exposure to contract renegotiation, shifting logistics priorities, or potential insourcing by these partners; any disruption or unfavorable contract terms could trigger sharp revenue volatility and undermine earnings predictability.
  
• Aggressive expansion of the fleet, combined with uncertain post-pandemic trade patterns and signs of recent volume weakness on certain routes, raises the risk of persistent overcapacity; this dynamic threatens to drive down asset utilization and diminish profitability, especially if demand fails to match optimistic supply projections.
  
• Ongoing advancements and adoption of autonomous ground delivery and electric trucking pose a growing threat to traditional time-definite air cargo, creating the risk of long-term market share erosion for Cargojet and putting downward pressure on both revenue and net income as logistics technologies evolve away from air-based solutions.

Cargojet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Cargojet compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cargojet's revenue will grow by 3.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 14.2% today to 9.0% in 3 years time.
• The bearish analysts expect earnings to reach CA$100.8 million (and earnings per share of CA$6.98) by about August 2028, down 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 bearish analyst cohort, the company would need to trade at a PE ratio of 16.6x on those 2028 earnings, up from 11.5x today. This future PE is greater than the current PE for the CA Logistics industry at 11.5x.
• 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 7.42%, as per the Simply Wall St company report.

Cargojet Future Earnings Per Share Growth

Risks

• The renewal and extension of multi-year contracts with Amazon (to potentially 2031) and DHL (to potentially 2037), including aligned growth incentives and minimum block hour guarantees, provide long-term revenue visibility, customer stickiness, and support for stable or rising revenues.
  
• The ongoing strength and resilience of the Canadian domestic e-commerce market-reflected in a 14% year-over-year domestic revenue increase and consistently strong demand from Amazon-suggests that underlying core business volumes remain robust, underpinning Cargojet's top-line growth.
  
• Cargojet is proactively upgrading and streamlining its fleet, including rationalizing aircraft types and selling certain aircraft to achieve operational synergies and maintenance cost efficiency, which could help improve margins and cash flow over time.
  
• Management is executing on cost control and operational improvement initiatives, as evidenced by a sequential 140 basis point EBITDA margin increase and expectations of continued efficiency gains, providing the foundation for potentially improved net margins and earnings.
  
• The company is positioned to grow internationally through new ACMI contracts, expanded charter operations, and global partnerships, with its strategic agreements offering right-of-first-refusal and early access to new routes; this business diversification could drive additional revenue streams and support longer-term earnings resilience.

Valuation

• The assumed bearish price target for Cargojet is CA$103.99, which represents two standard deviations below the consensus price target of CA$144.83. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be CA$1.1 billion, earnings will come to CA$100.8 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of CA$102.71, the bearish analyst price target of CA$103.99 is 1.2% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
• 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.