ZIM stock has become oversold on fears drop in profitability
- Dropping after its latest earnings report, sentiment for ZIM Integrated Shipping Services Ltd. (ZIM) has done a 180.
- While it’s undeniable that shipping rates are dropping from their 2021 peak, the market’s likely overreacting.
- This works to your advantage, as the stock today trades at a low valuation, even if earnings next year drop to the low end of estimates.
Over the past six months, sentiment for ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) stock has done a 180. Investors have gone from bullish to bearish on shares in the container shipping firm. Admittedly, for a rational reason: shipping rates are moving lower.
After peaking in 2021 rates have fallen considerably in 2022. It goes without saying that ZIM Integrated is going to report the level of earnings it reported in 2021 ($40.31 per share) or forecasted to report for 2022 ($42 per share).
The company is set to pay shareholders a $4.75 per share dividend on Sept. 8, but future payouts may come in lower. Its dividend fluctuates based on profitability. That said, there is a silver lining. The market has already priced in these declines, and then some. This may make it a buying opportunity for contrarian investors.
ZIM Stock, Recent Earnings, and Falling Shipping Rates
Trending lower since March, shares in ZIM Integrated have continued to drop throughout August. Earlier this month, its latest earnings report weighed on shares.
As InvestorPlace’s William White reported Aug. 17, revenue and earnings for the shipping firm came in short of estimates.
For the quarter, revenue came in at $3.43 billion, slightly below the sell side’s forecast ($3.63 billion). Earnings of $11.07 per share of ZIM stock may have been up compared to the prior year’s quarter ($7.38 per share). This fell short of estimates calling for quarterly earnings per share (or EPS) of $12.84.
CEO Eli Glickman’s reiteration of the company’s 2022 guidance failed to make up for this disappointment.
With Federal Reserve Chairman Jerome Powell all-but-stating “full steam ahead” in his latest statements on further interest rate hikes to curb inflation, recession fears are again spiking.
Still, while this could put more pressure on shipping rates, that’s not to say the company’s profitability is on course to sink to levels reported prior to 2020.
A Return to Pre-Pandemic Profitability? Not So Fast
Given the likely effect of the Fed’s tightening on demand, I can understand why many are worried about an increasingly-likely 2023 recession. In theory, a drop in demand could send rates back down to pre-2020 levels, bringing earnings for ZIM Integrated down to what it reported prior to its more recent windfalls.
This is very concerning when you consider that in 2018 and 2019, the company reported negative EPS ($1.26 and 18 cents, respectively).
However, take a closer look. It’s debatable whether a recession will result in earnings swinging from deep in the green, to treading in the red. Although ZIM’s rates are dropping, they’re still at levels several times that of the quarterly average rates it reported in the last quarter of 2019.
Furthermore, rather than a sharp plunge, given other factors related to the supply chain crisis, future declines could arrive gradually.
With this, even hitting the low end of estimates for EPS in 2023 ($9.78) may not be the tall order some analysts assume. $9.78 per share in earnings is nothing to sneeze at, relative to the stock’s current trading price (around $40 per share).
Bottom Line on ZIM Stock
ZIM Integrated Shipping Services stock currently earns a B rating in my Portfolio Grader. Trading for around 4.1x the low end of next year’s EPS estimates, uncertainty has been priced into shares, and then some. Recession or no recession, freight rates may not be in for a precipitous decline over the next twelve months.
If this ends up happening, it won’t be long before it heads back to much higher prices. Along with price appreciation, continued strong earnings will pay off for investors, in the form of cash dividends.
Per ZIM’s current dividend policy, it intends to pay out 30% of its net earnings as dividends. This further boosts potential total returns.
With negative sentiment overly priced in, and the stock trading at bargain basement prices, you may want to go against the grain, and buy ZIM stock after its latest selloff.
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