The COVID-19 pandemic has placed a spotlight on many industries. However, one that will likely be remembered decades from now is the e-commerce industry, and how it revolutionized the way people shop.
Sure, e-commerce existed long before the pandemic. But the overall fears of the virus itself along with numerous shutdowns across the country caused humans to change not only their spending habits, but their spending methods.
Companies like Amazon and Shopify exploded in popularity, and as a result items needed to be shipped to consumers across the country.
Enter Cargojet (TSE:CJT), an under the radar mid-cap air cargo company. Volumes exploded in 2020, and so did the company's share price, nearly tripling off pandemic lows.
However, many looking to buy Canadian stocks, particular growth stocks, are wondering if Cargojet still has some gas left in the tank, no pun intended. Lets take a look in this article.
What exactly does Cargojet (TSX:CJT) do?
Cargojet operates a domestic air cargo network between fourteen major Canadian cities. The company provides services such as aircrafts, crews, maintenance, and insurance, operating between points in Canada, the US, and Europe.
The company does have some international routes outside of these countries, shipping to Germany, Bermuda, and Mexico.
Cargojet's explosive growth in 2020
As we can imagine, e-commerce and online ordering exploded in 2020. As a result, many retailers needed Cargojet to get their products in customers hands.
Prior to 2020, Cargojet was a company that typically had low double digit growth in terms of revenue and had been steadily increasing free cash flow over the last half decade in the mid double digits as well.
In 2020, the company increased free cash flow by more than 100% over Fiscal 2019 and revenue soared to $648M, representing a 40% increase to the year prior. The last time the company had witnessed this level of explosive growth was in 2015, a year in which looking back now, was simply an anomaly.
But the real question that many investors have right now is if 2020 will be an anomaly for Cargojet, or if there will be a permanent shift, and thus permanent demand increase for Cargojet's services.
Growth will no doubt slow, but this is likely already priced in
I think it's safe to say that Cargojet's fascinating 2020 will likely be a year to remember, and the company will struggle to ever put up growth of the same trajectory. However, I do also feel that the company's stock price on a valuation basis is already factoring a bit of this in as well.
Investors know the world will not continue indefinitely in global lockdowns, and have adjusted their outlook on Cargojet accordingly. This is exactly why we're seeing the company trading over 20% lower than 2020 peaks.
Cargojet still has plenty of gas in the tank
Industry tailwinds are likely to continue indefinitely, and Cargojet is putting itself in a position to continue to be the dominant and most utilized air cargo company in the country.
Many Canadians who might have not shopped online prior to the pandemic have found it extremely convenient to do so, and will likely continue to do so as we get back to normal.
Bears will often state that Cargojet is one move away from devastation, that move being major shippers like Amazon deciding to get it's own aircraft fleets. However, the relationship between the two companies continues to expand.
Not only does Amazon have a material interest in the success of Cargojet through options that allow the company to take a potential 9.9% stake in Cargojet in the $90~ a share range, but it also recently agreed to operate multiple Amazon flights for Amazon's Canadian fulfillment center.
There's gas in the tank, but is the company valued fairly?
Expectations are for Cargojet to close out Fiscal 2021 with revenue of $707M. This would mark a single digit increase from 2020 levels, which considering the pace of deliveries and product movement in 2020 due to lockdowns should be considered a positive.
If we look to revenue growth in 2022 and 2023, it's expected to grow the top line by high single digits. Over that same timeframe, EBITDA is also expected to rise in the mid to high double digit range annually.
Cargojet is currently trading at 32 times forward earnings, 4.7 times sales, and 5.7 times book value. On a P/S and P/B value, these are well above historical averages. With an EV/EBITDA of 15, it is also trading at a significant (over 40% premium) to its 3, 5, and 10 year historical averages in this category.
To sum it up? Cargojet is expensive. Much more expensive than it has ever been. Is the premium worth paying? It is difficult to say right now. The difficulty with judging Cargojet based off historical averages is that the forward environment is changing, and has changed significantly. So, past valuation ratios are not factoring in the extensive level of growth.
As of right now, with a long term mentality I don't think the premium paid will come back to haunt investors. But, it's a stock that is likely to have some significant volatility in the event that things slow down in the short term.