Hey there Dan.
For quite some time now, I’ve been getting consistent questions about what companies will be most impacted by tariffs and what investors should do with their portfolios to mitigate them.
Ultimately, there is nothing we can do because we don’t know what will be in place and how long it will be in place. Any moves right now are speculative in nature. Although I’ll take speculative risks with smaller, individual positions, I don’t structure my entire portfolio around it.
Instead, I swam against the current and identified a stock that I believe would actually benefit from tariffs but doesn’t necessarily need them in place to succeed. In my opinion, this is a better strategy as it leads to a win-win situation.
I’ve had my eye on this company for quite a while now, and I believe it is time to add it to the Bull List. In addition, when my accounts settle after my transfer to Questrade, I will be taking a position in the company and making other moves. Still, I’ll cross that bridge when we get there and let you know.
I’ve added Cargojet (TSE:CJT) to the Bull List
Before I dig into the thesis, just know there is much more information on Cargojet inside of my report on the website. Risks, valuations, key performance indicators, competitor analysis, dividend analysis, and more.
These reports give you a bird’s eye view of my comprehensive research over at Premium and are must-reads, in my opinion. Frequent logins to your Premium dashboard will allow you to find an enormous amount of valuable information at your disposal.
Cargojet Thesis
First, I’d like to quickly explain the weaker grading when it comes to Cargojet on our screener. The primary thing dragging this company down in terms of grading is the weaker past returns and lower profitability due to a slowdown in shipping demand.
The lower grade is nothing more than the cyclical nature of freight demand, which witnessed a substantial rise during lockdown environments. The main points for my Cargojet thesis come from the Valuation and Outlook options, both of which are strong.
It is rare for a small-cap company to have a wide economic moat like Cargojet. One of the main reasons Cargojet can maintain its moat is due to strict regulations from the Canadian government regarding domestic cargo shipping. Under Canadian aviation law, 51% of a Canadian airlines voting shares must be owned by Canadians.
Because of this, it has been pretty much impossible for major shipping companies like Amazon, UPS, DHL, etc., to establish their own cargo airlines here in Canada, as they’ve done in the United States. This allows Cargojet, a company only worth $1.6B~, to have a stranglehold on domestic shipping in Canada.
Another added element: Even if there weren’t strict regulations, is the Canadian market big enough for many of these major players to lay out the capital expenditures to develop an air cargo fleet here in Canada? I would argue it isn’t, and the bulk of their capital expenditures will likely go to improving their US logistics network while they continue to outsource to companies like Cargojet here in Canada.
The company has major agreements with some of the largest shippers on the planet, including the ones I mentioned above. Amazon accounts for about a third of the company’s revenue, and it is currently awaiting renewal of a contract with the company, set to expire in the middle of 2025.
After this, it will go through 3 additional 2 year renewal periods. Although it is possible that Amazon does not renew this contract, and I will dive more into this in the risk section of the full report, considering the hurdles required to set up an air cargo network in Canada, I would be shocked if the deal wasn’t extended.
One of the company’s main forms of revenue generation is from its ACMI segment. This stands for Aircraft, Crew, Maintenance, and Insurance. Cargojet provides all of these to distributors like UPS and Amazon, and in return these distributors pay them a stream of recurring revenue. Although Cargojet is on the hook for maintenance of the aircraft, one thing it is not on the hook for in its ACMI segment is fuel costs. The distributors witness all of that volatility.
The company has been caught up in a multi-year downtrend in terms of lower demand for freight. There is nothing Cargojet could have done about this, as it was the pandemic that pushed a substantial amount of growth forward due to skyrocketing freight demand and consumer spending amidst lockdowns.
However, as interest rates continue to fall here in Canada, consumer wallets should start to open up again and as a result, I expect domestic and international cargo shipping to pick back up. This may not happen immediately, but I do expect it to happen over the short to medium term.
There is also the added tailwind of potential tariffs for Cargojet. If Canada and the US impose new tariffs on goods, it could indirectly benefit Cargojet by increasing demand for domestic air freight. As Canadian companies rely more on domestic manufacturing and distribution, demand for fast, overnight cargo transport within Canada rises.
In addition to this, higher tariffs and trade uncertainty can slow down cross-border trucking, leading some companies to shift to air freight for speed and efficiency.
At this point, I believe Cargojet provides an attractive risk/reward proposition from both a valuation standpoint and a growth standpoint. Although the company’s expansion in terms of fleet to keep up with Chinese shipping demands is likely to result in some costs over the short term, I expect double-digit growth out of the company moving forward.
You can read my entire research on Cargojet by clicking the link below:
