Since its first public offering in the United States, Israeli shipping business Market leader ZIM Integrated Shipping Services Ltd. (NYSE:ZIM). Zim stock has a historical profitability result from broad industry trends that are expected to continue in the coming years. An investor has a large margin of safety with a free cash flow yield of more than 130%.
Performance of Zim Stock Prices
At the time of writing, zim stock has increased by 174.17% after launching on the New York Stock Exchange (NYSE) in early 2021, compared to a -12.82% gain for the Russell 2000 Index (RUT). During that period, the company’s rivals outperformed the market, with Scorpio Tankers Inc (STNG) increasing 266.72%, Matson Inc (MATX) increasing 11.47%, Kirby Corporation (KEX) rising 36.17%, and Atlas Corp. (ATCO) increasing 30.22%.
However, the company’s stock has dropped 44.45% year to date. Existing shareholders who purchased the firm at the beginning of the year require an 80% increase in price merely to break even. It may be time to sell for those shareholders, but the situation is different for investors who do not own stock in the firm. One party’s risk is another’s opportunity.
ZIM Stock Historic Profitability
ZIM’s market run is the outcome of the company’s historical profitability in the aftermath of the global epidemic. As a result, the corporation is at the pinnacle of its profitability, boosting its financial performance. However, that success was not a one-time occurrence.
Between 2017 and 2021, ZIM compounded revenue at more than 29%, increasing sales from almost $2.98 billion in 2015 to nearly $10.73 billion in 2021. According to Credit Suisse’s Base Rate Book, only 1.9% of teams achieve a 5-year revenue compounded annual growth rate (CAGR) of such scale. The corporation earned roughly $13.75 billion in the previous twelve months (TTM).
The 5-year gross profit CAGR was approximately 85% throughout that period, with gross profit increasing from more than $280 million to more than $6 billion. Gross profitability increased from about 0.16 in 2017 to nearly 0.62 in 2021, considerably beyond Robert Novy-0.33 Marx’s benchmark for promising companies. Gross profitability has increased further in the TTM period to roughly 0.72, demonstrating advances in the company’s capacity to produce money. Operating profit has grown at a rate of more than 112% per year, from more than $135 million in 2017 to more than $5.8 billion in 2021. Operating profit was roughly $7.98 billion in the TTM quarter. The operating profit margin increased from $4.5% in 2017 to 54.2% in 2021, reaching 58% in the TTM period. The shipping industry’s operating profit margin was 56% in 2021, up from 3.7% in 2019. Net income increased from $6.24 million in 2017 to $4.64 billion in 2021, representing a more than 275% 5-year net income CAGR.
Net income for the TTM period is $6.2 billion. Free cash flow (FCF) has increased from more than $206 million in 2017 to $4.98 billion in 2021, representing a 5-year FCF CAGR of more than 89%. FCF was more than $6.6 billion over the TTM period. FCF margin has increased from 6.9% in 2017 to 46.4% in 2021, with a TTM increase of 48%. Return on invested capital (ROIC) has increased from -1.4% in 2018 to over 67.5% in 2021, with the TTM figure climbing to 193.8%.
The shipping sector follows Nicholas Kaldor’s cobweb model, in which there is a significant time lag between production choices and pricing changes, resulting in boom and bust cycles due to under- and over-estimation of future demand. With no meaningful pricing power, capital investment follows the trajectory of demand, growing during booms until capacity exceeds demand, at which point rates fall until surplus capacity is eliminated. Capital leaves along the road, with bankruptcies and consolidations, making industry prosperity more sustainable. We must consider the industry’s prospects to determine if ZIM can sustain its future profitability.
Sustainable Industry-Wide Profitability
The shipping sector has never been more profitable due to a rise in demand for cargo in the aftermath of the epidemic, port congestion, and a larger global supply chain disruption, which forced consumers to sign high-priced contracts. In 2021, the worldwide container shipping sector will make a record operating profit of roughly $110 billion, up from $37.5 billion in the previous decade.
As the US and worldwide economies begin to teeter on the verge of recession, freight rates have fallen in recent months. With global spot rates falling, there is much skepticism regarding the durability of this profitability. Nonetheless, it should be noted that freight charges remain historically high.
Rates will not revert to pre-pandemic levels, but there are compelling grounds to anticipate that future rates will be higher. Although pandemic restrictions have eased significantly, China maintains a zero-COVID policy. While port congestion is expected to ease throughout the rest of the year, the Russo-Ukrainian War and its impact on energy prices are likely to drive up long-term bunker fuel prices, keeping freight rates elevated.
Although shipping firms have used their historical profits to purchase new container ships, this is unlikely to enlarge the existing fleet in the short term, considering that a ship takes 18 months to build and may take longer to deliver.
It is hard to predict whether expanding the global fleet size would meet the world’s demands, surpass them, or be insufficient. Therefore, there is a negative relationship between asset growth and future returns in general. Currently, neither zim stock nor its peers should be viewed as long-term investments. Still, the delay in delivering ships, the continuation of China’s zero-COVID policy, the Russo-Ukrainian War, and the possibility of a Sino-American War over Taiwan within the next half-decade could keep rates elevated.
The maritime industry’s capital allocation practices have become increasingly cautious in recent years. For example, between 1980 and 2015, container ship capacity increased by 8.79%, from 11 million dry weight tons (DWT) to 228 million DWT. Growth has slowed to 2.44% CAGR between 2016 and 2021.
The maritime business had grown more lucrative due to increased capital discipline. Although there are concerns about future growth and trade, there is currently agreement that it will continue to grow, with IHS Markit estimating that the actual value of global trade will rise to $30 trillion by 2035, up from $20 trillion in 2021, translating to a volume increase from 12.8 billion metric tons in 2021 to 20 billion metric tons in 2035.
Zim Stock Valuation
ZIM stock has an FCF yield (FCF/enterprise value) of more than 130%, with more than $6.6 billion in FCF for the TTM period and an enterprise value of $5.03 billion. In comparison, New Constructs, LLC, a financial services organization, evaluated the FCF yield of the 2,000 giant corporations listed in the United States at 1.5%.
The FCF yield of the corporation indicates extraordinary future stock and company performance.
Conclusion
Since its NYSE debut last year, ZIM stock has outperformed the market and most of its rivals. The company’s historical profitability is due to factors other than the epidemic. In the past five years, the business it into a very lucrative enterprise. In recent years, capital discipline has aided this profitability. Furthermore, while it is unclear whether the industry will overshoot or undershoot demand with its capital expenditure, it will be several years before new supply hits the market, and during that time, there are good reasons to believe that freight rates will remain elevated compared to pre-pandemic rates. As a result, an investor has more than enough margin of safety with an FCF yield of more than 130%.
Featured Image – Megapixl © Magiorestock
