The ongoing Red Sea challenges have completely reshaped ZIM stock’s (NYSE:ZIM) investment case. With the Suez Canal, a pivotal bottleneck for global shipping, having virtually closed, vessels are forced to adopt longer routes, resulting in elevated shipping rates. Consequently, ZIM’s outlook, previously bleak with shares priced to converge to $0, now presents the prospect of considerable upside potential. Nonetheless, I am neutral on the stock.
I need to highlight that how the situation in the Red Sea evolves is entirely speculative. Still, I’ll attempt to outline the potential outcomes to help you decide whether you want to engage in this one or steer clear, considering the heightened volatility at play.
Due to ZIM’s investment case and underlying dynamics being rather intricate, let’s start from the basics.
A Quick Overview – What Does ZIM Actually Do?
With roots going back to 1945, Israel-based ZIM Integrated Shipping Services is one of the oldest shipping lines, boasting nearly 80 years of experience providing seaborne transportation and logistics services. The company operates a fleet of 145 vessels, including 129 containerships and 16 car carriers, sailing across all geographic trade zones.
Unlike its industry peers, like Danaos (NYSE:DAC) or Global Ship Lease (NYSE:GSL), which actually own containership vessels, ZIM does not own most of the fleet it operates. The company owns just nine container ships itself. Rather, ZIM charters/leases its fleet from owners like the ones mentioned while actively managing its operations. In other words, ZIM is responsible for the completion of each journey.
Given that ZIM has fixed vessel leasing costs but variable revenues due to shipping rates being highly volatile, the company can end up being highly profitable or losing a lot of money based on where the underlying rates are hovering.
Understanding ZIM’s Stock Price Movement
ZIM’s highly-volatile stock price expresses the dynamic I just mentioned. By going through the stock’s rise and fall, you will be better equipped to understand how the current Red Sea crisis affects the company.
The Rise of ZIM Stock
As you can see in the graph below, ZIM’s stock price surged between 2021 and 2022, driven by shipping costs skyrocketing during the COVID-19 pandemic.
The beginning of the COVID-19 pandemic led to intensified logistics bottlenecks, port congestions, and an escalating demand for cargo deliveries against a constricted containerhip market. Throughout 2021 and 2022, the prevailing rates reached unprecedented levels, translating into extraordinary earnings for the company.
To underscore the magnitude of this growth in rates and, consequently, ZIM’s earnings and dividends, consider that ZIM went public at $15 per share in January 2021. By the end of that year, ZIM had paid dividends of $19.50 per share. The subsequent year continued to exhibit strength, with ZIM paying out $16.95 in dividends.
Notably, in both years, dividends far exceeded the current stock price, providing insight into why Wall Street was trying to factor in these substantial gains throughout 2021 and 2022, which explains the surge in the stock price during that period.
The Fall of ZIM Stock
From 2022 onwards, shares of ZIM started to dip dramatically. With shipping rates normalizing, ZIM’s profit margins started to shrink. The latest Q3 results make for a nice example, as ZIM’s adjusted EBITDA plummeted to a mere $211 million from the previous year’s $1.93 billion.
Meanwhile, the company grapples with substantial short-term and long-term lease liabilities, amounting to $1.67 billion and $2.95 billion, respectively. This is because, as I mentioned earlier, the company doesn’t own most of the vessels it operates but leases them instead. As profits dwindle, ZIM faces the challenge of meeting substantial leasing obligations to vessel owners.
While the company holds $2.63 billion in cash, Wall Street was skeptical until recently, anticipating continued losses attributed to these lease liabilities. These lease liabilities could eventually lead to bankruptcy if below-profitable rates were to lead to continuous quarterly losses.
Surprisingly, the ongoing Red Sea situation has completely transformed this situation.
The Red Sea Situation Changes the Game
This brings us to the present and the ongoing Red Sea situation. As the share price graph illustrates, sentiment in ZIM stock has started to reverse lately.
In particular, the situation in the Red Sea has taken a noteworthy turn, spurred by the Houthis’ targeted attacks on multiple vessels last month. Presently, the Red Sea stands desolate, as nearly all operators have redirected their courses via The Cape of Good Hope.
A look at the latest transit data for all types of vessels through the Suez Canal clearly shows massive declines in utilization of this particular route on a significant scale.
This shift not only results in extended journeys, translating into increased day revenues for ZIM, but it also contributes to a scarcity of available ships. Consequently, the prolonged travel times lead to higher rates, presenting a dual advantage for ZIM.
The combination of increased employment opportunities and higher rates proves exceedingly beneficial for the company. What was previously a journey toward bankruptcy (due to plunged profitability against huge lease liabilities) is now being confronted by an exceptionally bullish outlook.
Where Does ZIM Go From Here?
The Bull Case for ZIM
The bull case for ZIM pretty much assumes that the ongoing resurgence in shipping rates as a result of the effective abandonment of the Red Sea is going to last. Jefferies estimates that next year, ZIM can post EPS of $6.25 for FY2024 compared to the prior consensus of -$3.91 in losses per share.
Combined with ZIM’s dividend policy of paying out between 30% and 50% of its net income, the stock appears to be a bargain. And that scenario doesn’t even include rates surging further, in which case ZIM could end up paying dividends equal to its current stock price this year, thereby resulting in shares surging from their current levels.
The Bear Case for ZIM
On the contrary, the pessimistic outlook for ZIM assumes a scenario where the current upward trend in rates swiftly ends in the upcoming weeks or months. This could be the case if a potential resolution to geopolitical tensions in the Red Sea occurred. In such a scenario, ZIM may promptly revert to generating minimal or no profits. Its investment case, therefore, would revert to the prior sentiment that underscores the risk posed by its increasing lease liabilities.
Final Thoughts: Nobody Really Knows What’s Going Happen
I have followed ZIM over the years and occasionally successfully traded the stock. I can tell you with certainty that nobody knows what will happen from here and where ZIM stock is heading. Knowing tomorrow’s rates, let alone a few months from now, is impossible due to numerous unpredictable factors that can change each variable.
The ongoing situation in the Red Sea is a major catalyst, but other factors, such as many newly-built containerships hitting the water next year (large order book), could also sway rates in either direction.
I hope that outlining ZIM’s ongoing circumstances can help you decide if you want to take a bet in this rollercoaster of an investment case. Nevertheless, I would advise that you only touch this stock if you are highly experienced and familiar with the shipping industry and its highly-cyclical nature.
