ZIM Integrated Shipping Services (NYSE:ZIM) is an Israeli international cargo shipping company and among the top 20 carriers worldwide. But it’s arguably the most volatile in the sector (and recently plunged), with its business model leaving it vulnerable to fluctuations in freight rates. There’s a lot to unpack, both upsides and downsides, and for now, I’m neutral on the stock. I simply can’t put my money behind it when there are so many variables at play.
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ZIM Hit by Citi Downgrade
ZIM stock fell nearly 20% on June 6 after Citi (NYSE:C) downgraded the shipping company from Neutral to Sell, adjusting the price target to $13.00 from the previous $11.60. The bank said ZIM was overexposed to spot prices and noted that the company’s contract coverage of trans-Pacific routes was below average.
According to Citi, just 35% of ZIM’s trans-Pacific trade volumes are under contract. This, the analysts highlighted, is notably less than the industry average of around 65%. ZIM’s trans-Pacific trade represents 40% of total volumes.
The pullback in the share price came after a very successful month for ZIM. The stock soared from around $11.80 at the end of April to $23.80 a month later on the back of a strong showing in Q1 and as analysts pointed to strong tailwinds in the sector.
Data from the Shanghai Containerized Freight Index (SCFI) has also been encouraging. In early May, the SCFI showed that prices were up 31% from the beginning of the year and 72% since mid-December. In June, the index showed that shipping prices had reached an 18-month high, with the average cost of a 20ft container being shipped from Shanghai to Europe hitting $3,949.
Was ZIM Caught Exposed?
ZIM has typically differentiated itself from the wider industry by focusing on shorter-term contracts and having greater exposure to spot prices. This means ZIM is more dependent on freight rate fluctuations, representing both an opportunity and a risk. So, with the spot price hitting an 18-month high, business should be booming. Analysts have also pointed to shortages within the sector — both ships and containers.
At this moment, there’s very little cause to turn bearish from the industry’s dynamics. In May, analysts pointed towards a strong summer with an uptick in demand earlier than usual. Jefferies, in a May note, suggested that 90% of Red Sea traffic was still being diverted around Africa, adding thousands of miles to routes and exacerbating existing shortages.
However, the long-term forecast is weaker, partially because the order books for ZIM and many of its peers are rather strong, potentially leading to a position of oversupply. New supply coming online also reflects construction challenges during the pandemic, when shipbuilding yards were on lockdown.
The upside for ZIM here is its greater operational leverage. Increasing exposure to spot prices when they’re high and decreasing exposure when spot prices are falling is a riskier but potentially more lucrative way of approaching the business.
Moreover, it’s worth highlighting that medium-term forecasts — which broadly depict this notion of oversupply — can’t accurately account for geopolitical events. It’s very hard to forecast what will happen next. Even the best geopolitical consultancies say this. However, it’s worth noting that geopolitical events, such as renewed hostilities by Iranian proxies, may have a supportive impact on freight rates.
There’s also the matter of ZIM’s fleet transition to consider. The company is set to take delivery of 22 vessels on long-term charter agreements during the year, taking the total number of new vessels to 46. While these new vessels are more efficient than their predecessors, the firm’s lease liabilities are expected to continue rising until the last of these vessels has been delivered.
In short, there are plenty of variables. Will conflicts be prolonged and keep freight rates high? Will new vessels coming online push the industry into a position of oversupply? Will ZIM’s new fleet radically improve efficiency? Will leasing liabilities prove too costly? For now, at least, most analysts’ forecasts show a steep decline in earnings per share for 2025.
Is ZIM Stock a Buy, According to Analysts?
On TipRanks, ZIM comes in as a Moderate Sell based on one Buy, one Hold, and three Sell ratings assigned by analysts in the past three months. The average ZIM Integrated Shipping Services stock price target is $12.29, implying 34.5% downside potential.
The Bottom Line on ZIM Stock
When I first covered ZIM stock in April, the share price was around $10, and I was able to put the risks to one side, given the potential upside. I was bullish, and thanks to near-term trends, the share price has surged since then. And if it were offered by my UK-based brokerage, I would have invested.
However, at $18.77, it’s a whole new proposition. Putting aside technical analysis, concerns about market oversupply and ZIM’s liabilities are too large to ignore. There’s also a host of variables, and I’m just not sure I can put my money behind the stock.
