Cargojet (CGJTF), a leading Canadian express delivery airline, has seen its share price rise by 32.2% since my previous report, outperforming the S&P 500's 2.3% decline. Despite this rally and recent downward revisions in analyst estimates, the company remains an attractive investment. The estimate cuts are primarily due to weaker ACMI (Aircraft, Crew, Maintenance, and Insurance) and charter revenues, as long-haul block hours have decreased, coupled with limited flexibility for cost reductions. Nonetheless, I maintain a price target of $79.37, indicating a potential 21% upside, based on a 7.5x EV/EBITDA multiple to reflect current operational conditions. Despite increased capital expenditures and lower aircraft utilization, Cargojet continues to generate positive free cash flow and maintain healthy net debt leverage, enabling ongoing share repurchases.
The recent downward revisions in Cargojet's earnings estimates highlight a challenging operating environment. Reduced long-haul block hours, particularly stemming from changes in DHL's network and fewer flights between China and Canada, are significantly impacting both revenue and earnings per share (EPS) forecasts for the fourth quarter and beyond. This situation underscores the cyclical nature of the air cargo industry and its sensitivity to global trade and logistics adjustments. The company's management faces the task of navigating these headwinds while maintaining operational efficiency and financial stability. The inflexibility in cutting costs further exacerbates the pressure on margins, making strategic planning crucial for future performance. Despite these challenges, the continued positive free cash flow generation suggests a resilient business model capable of weathering downturns.
Cargojet's capital allocation strategy, even amidst lower aircraft utilization, appears sustainable. The company's capital expenditures are primarily directed towards fleet modernization and expansion, anticipating future demand and operational needs. This forward-looking investment, combined with robust free cash flow, allows Cargojet to continue its share repurchase program, returning value to shareholders. The company's net debt leverage remains within a healthy range of 2x-3x, providing financial flexibility and mitigating risks associated with market fluctuations. This prudent financial management is critical, especially when faced with reduced operational activity and revenue pressures. The ability to fund strategic growth and shareholder returns while maintaining financial health is a testament to Cargojet's strong underlying fundamentals.
Cargojet presents a compelling investment case, balancing recent market appreciation and revised financial outlooks with solid financial health and strategic long-term planning. The company's capacity to generate free cash flow and manage debt effectively, even in a challenging operational climate marked by declining block hours and limited cost flexibility, positions it favorably. My valuation, reflecting current operational realities, suggests a significant upside, underscoring the enduring value of its express delivery services in Canada. Despite the headwinds, Cargojet's resilience and commitment to shareholder returns make it an attractive opportunity for investors looking for stability and growth in the air cargo sector.
