Shipping – Fountainheadinvesting

ZIM Integrated (ZIM) $23 (Shipping)

Highly Cyclical dependent on freight rates.

The short-term pop may continue for a while, I’m not investing in it because it’s too cyclical and difficult to predict freight rates, which are again tied to the global economy.

This year is very good based on increased freight rates and the return of the dividend. Dividends return after higher freight rates, higher shipping volume, and lower fuel costs.

Management said it now expects $2.6 billion to $3 billion in adjusted earnings before interest, taxes, depreciation and amortization for 2024, up from a previous range of $1.15 billion to $1.55 billion.

During the second quarter, ZIM (ZIM) swung to a profit of $373 million, or $3.08 a share, from a loss of $213 million, or a loss of $1.79 a share, a year earlier.

ZIM’s (ZIM) board declared a cash dividend of approximately $112 million, or $0.93 a share, payable on Sept. 5.

In terms of downside risks, as aforementioned, ZIM’s underlying business is highly cyclical and responds sensitively to shipping rates. To wit, the rates were mostly in the range of $2,000 to $4,000 a year ago per 40-foot container. These rates have climbed substantially since then and peaked in the $8,000 to $10,000 range recently.

There haven’t been enough improvements in 2-3 year forecasts which are still negative for sales and earnings, so definitely not a long term investment.

It’s a cyclical business with long term revenue growth now expected to be 6-7% but given better operating efficiency earnings should increase about 12%. That said this is a low margin high cost/high volume business, operating margins are only 8%.

2023 was a weak year, revenue dropped 12%, the first in 9 years. Management has cautioned weakness for 2024 as well, but business should pick up in 2025

It being a cyclical business, buying the stock cheap is essential to make a decent return on investment, and at $105 the stock is about 30% cheaper than the 52-week high of 154. It is also substantially cheaper than some of its peers like XPO and Heartland.

The good thing about cyclicals is that they outperform from the bottom of the down cycle so if one picks up a stock like Arcbest really, really cheap at $80-$85, it can easily scale back to $150 in 3 years, which means doubling your investment. Given that there is nothing exceptional about the business or the company I would wait for a really cheap price.