Trouble on the high seas is causing shipping rates to soar, which in turn is helping Zim Integrated Shipping Services (NYSE: ZIM) deliver for investors.
The container shipping company's shares jumped sharply at the open Monday and were up by about 22% as of 10:56 a.m. ET after the company released quarterly results that easily topped expectations.
A favorable current
Zim incurs high fixed costs to buy and maintain ships, but it operates in a cyclical business -- it can experience huge swings in revenue based on the health of the global economy and demand for capacity inside those ships.
Geopolitical events have worked in Zim's favor in 2024. Attacks by Yemen's Houthi rebels on cargo ships in the Red Sea's shipping lanes have caused shipping rates to rocket higher. Zim had capacity available and is benefiting from its ability to hike its prices.
Zim earned $3.08 per share on revenue of $1.93 billion in the second quarter, topping Wall Street's consensus estimates of $1.79 per share on sales of $1.8 billion. CEO Eli Glickman credited Zim's decision to increase its spot market exposure for the beat.
"This has enabled us to capture significant upside in a rate environment that has been elevated for longer than anticipated," Glickman said. "We expect our results in the second half of 2024 to be better than in the first half of the year, driven by continued supply pressure from the Red Sea crisis, combined with current favorable demand trends."
Is Zim a buy?
The company raised its full-year adjusted EBITDA guidance to a range of $2.6 billion to $3 billion from its prior forecast range of $1.5 billion to $1.55 billion, an indication of how bullish Glickman is about the remainder of the year. Container ships take years to build, so it isn't easy for shippers to quickly add capacity when rates are high. This gives companies that already have excess capacity available (like Zim) a clear advantage.
Zim's stock could go higher from here, but investors need to remember that with cyclicality comes volatility. The last time that shipping rates softened -- the period from 2022 until 2024 -- Zim's shares lost more than 90% of their value. The company is stronger now than it was then, but it won't enjoy smooth sailing forever.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Zim Integrated Shipping Services. The Motley Fool has a disclosure policy.
