Tension in the Middle East is causing chaos in key global shipping routes, which could alter the economics of of the region’s top shippers. Shares of Zim Integrated Shipping Services (NYSE: ZIM) are up 10% as of 10 a.m. ET Monday after an analyst said “the script has flipped” for the once-challenged company.
Rough geopolitical seas are changing the narrative around shippers
2023 was shaping up to be a tough year for global shipping companies, with concerns about the economy worldwide and a post-pandemic demand boomerang weighing on volumes and pricing. Investors were worried, sending shares of Israeli shipping specialist Zim Integrated down about 75% from their March highs on concerns the company would struggle to manage its debt.
But geopolitical events have altered the situation significantly. Attacks on Red Sea shipping lanes by groups based in Yemen are having a major impact on operations, causing shipping rates to skyrocket higher.
The shift has caused Jefferies to change its view on Zim shares, with the bank upgrading the stock to buy from hold and raising its price target to $20 from $14. Zim Integrated has moved from a cash burn situation to becoming a “significant” cash generation story, according to Jefferies. With Red Sea diversions likely to continue for an extended period, capacity will probably remain tight and rates should stay high for the foreseeable future, in Jefferies’ view.
Is Zim Integrated a buy heading into 2024?
Zim Integrated is reliant on spot rates, not long-term contracts. As the past year has shown, that leaves the stock vulnerable to spikes higher and lower based on demand.
For investors who understand and can stomach the inherent volatility of the model, there could be an opportunity here if geopolitical tensions remain high in the region. But investors buying in now need to be mindful that it is really hard to predict the future, and that the geopolitical tension fueling the rise in shipping rates could shift on a moment’s notice.
Those with a long-term focus would be wise to stay away from Zim.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Jefferies Financial Group. The Motley Fool recommends Zim Integrated Shipping Services. The Motley Fool has a disclosure policy.
Why Zim Integrated Shipping Stock Is Cruising Higher Today was originally published by The Motley Fool
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