ZIM stock has been oversold due to fear of falling profits
- Falling after the latest earnings report, sentiment for ZIM Integrated Shipping Services Ltd. (ZIM) made a 180.
- While there’s no denying that shipping prices are falling from their 2021 highs, the market is likely to overreact.
- This works in your favor, as the stock trades at a low valuation today, even if next year earnings fall to the bottom of estimates.
Over the past six months, love for ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) the stock has reached 180. Investors have gone from bullish to bearish in the stock of the shipping container company. Admittedly, for a good reason: Shipping costs are decreasing.
After peaking in 2021, rates have fallen significantly in 2022. It goes without saying that ZIM Integrated will report the earnings it reported in 2021 ($40.31 per share) or forecast reported in 2022 ($42/share).
The company is expected to pay a shareholder dividend of $4.75 per share on September 8, but future payouts could be lower. Its dividends fluctuate based on profits. That said, there is a silver lining. The market has priced in these drops, and then some. This can make it a buying opportunity for contrarian investors.
ZIM Stock, Recent Earnings, and Dropping Shipping Rate
Trending lower since March, shares of ZIM Integrated have continued to fall throughout August. Earlier this month, the company’s latest earnings report weighed on the stock.
Like InvestorPlace’s William White reported August 17, revenue and earnings for the shipping company lack of estimate.
For the quarter, revenue came in at $3.43 billion, slightly below seller’s forecast ($3.63 billion). Income of $11.07 per share of ZIM stock may have increased from the previous quarter ($7.38 per share). This doesn’t match the estimate 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 declared “absolutely ahead” in his latest statement on further rate hikes to curb inflation, Recession fears spike once again.
However, while this may put additional pressure on shipping prices, that doesn’t mean the company’s profits will of course drop to levels reported before 2020.
Return to pre-pandemic profitability? Not too fast
Given the potential impact of the Fed’s tightening of demand, I can understand why many are worried about an increasingly likely recession in 2023. In theory, a drop in demand could be causing interest rates to drop to pre-2020 levels, bringing ZIM Integrated’s earnings to levels the company reported before the recent headwinds.
This is concerning when you consider that in 2018 and 2019, the company reported negative EPS ($1.26 and 18 cents, respectively).
However, let’s take a closer look. It is still debatable whether a recession will lead to earnings fluctuating from deep in the blue to stepping on the red. Although ZIM’s rates are falling, they are still at several times the quarterly average rate it reported last quarter of 2019.
Furthermore, rather than plummeting, due to other factors related to the supply chain crisis, future decline may come gradually.
Given this, even hitting the low end of the estimate for EPS in 2023 ($9.78) may not be the high some analysts assume. Earnings of $9.78 per share are nothing to worry about, compared to the stock’s current trading price (about $40 per share).
Summary of ZIM Stock
Shares of ZIM Integrated Shipping Services now have a B rating in Portfolio Scoring Machine. Trading at about 4.1 times the bottom of next year’s EPS estimates, the uncertainty has been priced into the stock, and then some. Recession or no recession, freight rates may not fall sharply in the next twelve months.
If this ends, it won’t be long before it returns to much higher prices. Along with the price increase, continued strong profits will pay off to investors, in the form of cash dividends.
Under ZIM’s current dividend policy, ZIM intends to pay 30% of net income as dividends. This further increases the total potential profit.
With the negative sentiment being overvalued and the stock trading at bargain prices, you may want to go against it and buy ZIM stock after the most recent sell-off.
Originally published on InvestorPlace. Read Here.
Featured image credit: Photo by Kelly; Bark; Thank you!
