00:00 Should you buy Zim Integrated Shipping, ticker symbol ZIM?
00:04 If there's one event that stands out in the last couple of years, it's the pandemic.
00:09 Covid had a significant impact on the lives of so many people,
00:13 and lockdowns caused supply chains to go haywire. The increase in demand for goods
00:18 during the pandemic allowed freight companies to charge premium prices,
00:22 and this caused freight rates to hit record levels. One of the companies to benefit from
00:27 all this was freight business Zim, which has a current market cap of $2.4 billion.
00:32 After posting flat revenue for almost a decade, Zim grew revenue by 169% in 2021
00:40 to $10.7 billion, and it increased even further to $12.6 billion in 2022.
00:47 Before the pandemic, Zim was struggling to barely break even, but profits ballooned in 2020 and
00:53 kept increasing. In 2022, the operating profit of Zim was $6.1 billion and net income was $4.6 billion,
01:01 which is significantly higher than today's market cap. The company also has $3.2 billion in cash and
01:07 investments, and $2.5 billion in lease liabilities. So looking purely at the financials and the
01:14 balance sheet, Zim looks undervalued. The business is valued at half last year's earnings, and
01:19 incredibly, it's got more cash on its balance sheet than its current market cap. However, looking at
01:25 the P/E ratio is meaningless in this case because the coming years are going to be very challenging
01:30 for Zim. The high freight rates that we saw during lockdowns are a thing of the past, and demand is
01:36 being crushed by inflation, so the most likely outcome is a reduction in freight rates to pre-
01:41 pandemic levels and a reduction in Zim's revenue. Shipping is intensely competitive and low margin,
01:48 so Zim will see significant pressure to its bottom line. In fact, based on analyst estimates,
01:54 earnings per share will turn negative in 2023 and stay there for the next few years. In other words,
02:01 Zim has several years of losses ahead and that's going to eat up cash from the balance sheet.
02:06 Moreover, management typically pays 30-50% of net income in the form of dividends, but if net income
02:13 turns negative, then investors can expect that dividend to be significantly reduced as well.
02:18 And the reduced dividend is going to frustrate investors and put pressure on the stock.
02:23 Zim has cash to play with, and perhaps it could scale down part of its business or move into
02:29 something higher margin, but these types of stocks are notoriously boom or bust and depend very much
02:35 on macro conditions, and it's worth noting that Zim has a high short interest of over 20%.
02:42 Overall, there may be some reasons to buy Zim's stock, but shipping stocks are best
02:46 left to industry experts and I see too many red flags to warrant an investment. I therefore give
02:52 this stock a neutral rating, but these are my personal opinions, not financial advice,
02:57 and I've got no position in this stock.
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