High Ground Investment Management raised two big red flags and revealed a short position in Cargojet Inc (TSE: CJT) at the Sohn Conference last week.
The hedge fund is betting against Canada’s largest cargo airline due to its aging fleet and accounting malpractices.
High Ground finds Cargojet stock expensive at about 27 times earnings.
In comparison, conventional airlines like Lufthansa and United are going for under 10 times at writing.
Cargojet stock could suffer from an aging fleet
High Ground built a short position in Cargojet as its aircraft are 30 years old on average.
Typically, commercial aircraft remain in the fleet for 24 years only.
Plus, more than 30% of air freight is transported via commercial air carriers.
This makes it a lot more challenging for Cargojet to raise prices in pursuit of higher profits as its customers can easily switch to cheaper alternatives like passenger airlines, the hedge fund added.
CJT may have been avoiding taxes
High Ground also cited accounting malpractices as it revealed a short position in Cargojet stock.
“They’ve got a very cunning way of avoiding tax. They show the tax authorities different accounts for the ones that show us. And in these accounts, they don’t make any money at all,” Edgar Allen – the founder of High Ground said at the Sohn Conference.
The cargo airline paid CAD 6.5 million ($4.62 million) in income taxes in its latest reported quarter.
Nonetheless, Cargojet stock remains attractive for income investors as it currently pays a dividend yield of 1.14%.
Cargojet responds to High Ground’s allegations
Cargojet Inc. has already rejected the allegations, saying it maintains its aircraft regularly.
Edgar Allen, as per a company representative, has minimal understanding of the cargo business – and the valuation is justified considering CJT doesn’t have a direct peer, they added.
The news arrives only weeks after Cargojet reported its earnings for the third quarter that topped Street estimates.
The Canadian firm saw its revenue jump 15% to CAD 246 million in Q3 – in line with expectations.
Wall Street disagrees with High Ground on CJT
On the plus side, Wall Street doesn’t seem to share the concerns that High Ground has about Cargojet.
In fact, Scotiabank analyst Konark Gupta sees an upside in Cargojet stock to CAD 174 which translates to a more than 40% upside from here.
Gupta recommends buying CJT on the recent weakness as it has a “unique business model and market position,” as per his recent research note.
Walter Spracklin of RBC Capital Markets is even more positive on Cargojet shares. He expects solid peak season demand and strong volume growth to push them to CAD 189 by the end of 2025.
Cargojet stock is down 12% versus its year-to-date high at writing.
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