Direct Shipping Routes Will Boost Freighter Capacity Despite Margin Concerns

Key Takeaways

• Decoupling of North American supply chains from Asia is expected to boost revenue growth and drive expansion opportunities for Cargojet.
  
• Fleet expansion and increased online sales penetration likely to enhance revenue and earnings stability, offsetting softer segments.
  
• Economic uncertainties, competition from foreign e-commerce, and variable labor costs threaten Cargojet's revenue growth and earnings visibility amid changing global supply chain dynamics.

Catalysts

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

• Cargojet anticipates benefiting from the expected decoupling of North American supply chains, allowing more cargo to enter Canada directly from China and Southeast Asia, which could drive revenue growth.
  
• The increased penetration rate of online sales in Canada is expected to boost the company's domestic and scheduled charter revenue segments, positively affecting overall revenue.
  
• The company's portfolio diversification since 2019, with growth in domestic and charter businesses offsetting softness in the ACMI segment, suggests a strategy that may enhance net margins and earnings stability.
  
• The addition of three 767-300 freighters to the fleet later in the year is expected to support growth CapEx deployment, potentially impacting revenue positively by increasing cargo capacity.
  
• Cargojet is actively pursuing new opportunities, such as direct shipping routes from China, which could further revenue growth and improve earnings as global supply chains adjust.

Cargojet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cargojet's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.2% today to 8.6% in 3 years time.
• Analysts expect earnings to reach CA$100.4 million (and earnings per share of CA$7.44) by about May 2028, down from CA$123.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2028 earnings, up from 10.7x today. This future PE is greater than the current PE for the CA Logistics industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 5.76% 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

• Cargojet is experiencing decreased demand in its ACMI segment, particularly on international routes for DHL, impacting revenue from this channel.
  
• Global economic uncertainties, including tariffs and trade wars, pose risks to Cargojet's ability to maintain consistent revenue growth amid shifting supply chain trends.
  
• The labor costs fluctuate significantly due to temporary factors like overtime and training, which could impact net margins if not managed effectively.
  
• Increasing competition from foreign e-commerce companies like Temu and Shein poses risks to Cargojet's domestic revenue as these companies transport goods directly from China, potentially bypassing traditional shipping routes.
  
• The potential for economic slowdowns and inflationary pressures could reduce consumer spending, affecting earnings visibility for Cargojet despite high shipping volumes.

Valuation

• The analysts have a consensus price target of CA$144.25 for Cargojet based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.2 billion, earnings will come to CA$100.4 million, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of CA$85.51, the analyst price target of CA$144.25 is 40.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.