ZIM Stock Analysis PE RATIO OF 1.4?!?!
Is ZIM too good to be true? We think so...
As I Was Browsing Reddit A Couple Weeks Ago I Came Across This Post
I could hardly believe my eyes, A company that was highly profitable, low PE ratio, low PB ratio, a massive 20% dividend, and positive revenue growth.
It was so unbelievable that I needed to do further research to see if it was good as it seemed. This newsletter is about what I discovered in my analysis of the company.
First Here’s Some Context:
ZIM is an Israeli maritime shipping company. They are one of the top 20 shipping companies in the world with 4,427 employees. The company was founded in 1945 and initially started by shipping hundreds of thousands of immigrants to the newly created nation. The company, while in existence for three quarters of a century, only went public in January of 2021.
Quick Financial Ratios:
At the time of writing this the price of ZIM is $59.40. This puts its PE ratio at 1.49 and its PB ratio at 1.53. Return on equity for fiscal year 2021 is 191% and return on assets was 75%. The ratio between these two figures is 2.55:1. If we compare this to their debt to equity ratio of 1.14:1 we can see that they are using their leverage effectively because their returns outpace their level of debt. Their quick ratio (assets - inventory)/current liabilities sits at 1.78 and their current ratio (current assets/current liabilities) is a bit higher at 1.84.
As We Can See, The Company is in a Fairly Healthy Spot Just Looking at The Ratios
It is not saddled by an enormous amount of debt relative to its equity and is trading at an extremely low valuation given its margins on assets and equity.
However, we need to look a little deeper than that. If we look at the balance sheet for fiscal year 2021 we find something a bit concerning.
Over half of the company’s shareholder equity comes from retained earnings that occurred only in 2021! Before this last year the company was running a retained deficit of over a billion dollars.
In 2021 they made $4.65 billion dollars and in 2020 they made only $524 million. The years before that are even worse, 2019 was a loss of $13 million, 2018 was a loss of $120 million, 2017 was a gain of $11 million, 2016 was a loss of $164 million, and 2015 was a gain of $7 million.
Out of all seven years only two of them had good earnings for the current valuation of the company and those occurred during a black swan event that may or may not continue.
According to ZIM management the increases in revenue in 2021 are mainly due to an increase in freight rates and carried volume.
While carried volume may remain or increase from its current levels it is unlikely that freight rates will remain at these historically high levels. This can be attributed to the mean reverting nature of freight costs.
This coupled with the highly cyclical nature of ocean shipping means that these high levels of earnings are unlikely to be sustained over the long term. Given that ZIM has ordered 36 new vessels the market conditions will have to support this large increase in their fleet size.
According to ZIM:
During 2021 and subsequent to year end, ZIM entered into four charter agreements for a total of 36 newbuild vessels, as follows:
10 x 15,000 TEU LNG dual-fuel container vessels chartered from Seaspan, intended to serve on the Asia to US East Coast trade
18 x 7,000 TEU LNG dual-fuel container vessels chartered from Seaspan (15 vessels) and an affiliate of Kenon Holdings (3 vessels), intended to serve across various global trades
8 x 5,300 TEU wide beam vessels chartered from Navios Maritime Partners, intended to serve in trades between Asia and Africa
All the newbuild vessels are expected to be delivered to ZIM during 2023 and 2024.
With these container ships averaging about $100 million dollars each, ZIM is looking to spend over $3 billion on ships which is currently about 65% of shareholders equity and 30% of total assets.
Again, if industry forecasts of lower shipping rates are correct, this could be a concerning observation.
Now Let’s Just Say Hypothetically That ZIM’s Earnings Fell to Pre-2020 Levels
What would that look like on our financial ratios?
(For reference we’ll use $100 million net earnings as an optimistic outlook.)
At the current market capitalization of $7.12 billion and 119.81 million shares outstanding we would be looking at approximately $0.83 cents of earnings per share, putting our PE ratio at 71.56.
Return on equity would fall to just over 2% and return on assets would fall to 1%.
What Does This Mean For ZIM?
This analysis of ZIM is not meant say that ZIM is a bad company, but simply is trying to show that investing in ZIM by projecting its 2020 and 2021 earnings into the future would be a bad idea. The shipping industry as mentioned before is highly cyclical and thus, the current earnings cannot be expected to be sustained. Any bet made on this company will not be based on its financials but rather what the ocean shipping cycle will look like over the next few years.
These two issues should not be conflated, if you have strong conviction that ocean shipping will remain strong throughout the next few years, then ZIM could be a good bet. However, if you are only interested ZIM based on its current earnings and assets then I would recommend staying away from this company entirely.
Hopefully this company analysis has been insightful, if you found it interesting or enlightening please take a moment to share it with a friend using the share button below. It really helps me out. And if you have any comments, questions, or possible rebuttals to my arguments here by all means leave them in the comments! I would love to see your thoughts and will be responding to all comments.
With that said…
Until Next Time!
Disclaimer:
All content is for discussion, entertainment, and illustrative purposes only and should not be construed as professional financial advice, solicitation, or recommendation to buy or sell any securities, notwithstanding anything stated.
There are risks associated with investing in securities. Loss of principal is possible. Some high-risk investments may use leverage, which could accentuate losses. Foreign investing involves special risks, including a greater volatility and political, economic and currency risks and differences in accounting methods. Past performance is not a predictor of future investment performance.
Should you need such advice, consult a licensed financial advisor, legal advisor, or tax advisor.
All views expressed are personal opinion and are subject to change without responsibility to update views. No guarantee is given regarding the accuracy of information on this post