Cargojet: Air Cargo Leader Nearing End of Capex Cycle, FCF to Accelerate

Reno Giancola and Jeff Hales of Alignvest Capital Management presented their in-depth investment thesis on Cargojet (Toronto: CJT) at Wide-Moat Investing Summit 2018.

Thesis summary:

Cargojet is the largest overnight air cargo company in Canada, with ~90% market share. This industry is a natural monopoly, as better utilization drives greater efficiencies and lower costs for shippers. Cargojet’s network has been assembled opportunistically over the past twenty years and would be nearly impossible to replicate at any reasonable return on capital. Foreign ownership restrictions create additional barriers to entry.

The two major value drivers for Cargojet will be growth in e-commerce (customers expect shorter delivery times) and operating leverage (high returns on incremental revenue in light of the fixed-cost nature of the business).

The company is nearing the end of a significant capex cycle, and as FCF growth begins to accelerate, Reno and Jeff expect management to increase the return of capital to shareholders through a growing dividend. Despite the effective monopoly, secular tailwinds, and high returns on capital, Cargojet trades at a similar multiple as do trucking operators, a valuation disconnect that should correct as the company grows in size, liquidity, and institutional following.

Between growth in intrinsic value and multiple expansion (a narrowing of the NAV discount), Cargojet’s share price could double over four years.

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About the instructors:

Reno Giancola is a Portfolio Manager at Alignvest Capital Management. Mr. Giancola was previously a Vice-President & Portfolio Manager at Gluskin Sheff + Associates, where he managed several North American equity long/short Funds. Prior to Gluskin Sheff, he worked in private equity with Scotia Merchant Capital. Mr. Giancola graduated from Wilfrid Laurier University with a Bachelors of Business Administration and a minor in Economics. He has also earned his Chartered Financial Analyst (CFA) designation. Mr. Giancola is an elected member of the User Advisory Council of the Accounting Standards Board.

Jeff Hales is a Portfolio Manager at Alignvest Capital Management. Mr. Hales was previously a Vice-President & Portfolio Manager at Gluskin Sheff + Associates, where he managed and co-managed a number of portfolios including the Canadian Equity, North American Value and Resource Funds. Prior to Gluskin Sheff, he worked in private equity with TD Capital, and in investment banking with Goldman Sachs. Mr. Hales graduated from Wilfrid Laurier University with a B.A. in Economics, earning the Governor General’s Academic Medal as the top student in his undergraduate class. He has also earned his Chartered Financial Analyst (CFA) designation.