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Shipping Rates are Through the Roof. Here’s How to Play Them.

Shipping Rates are Through the Roof. Here's How to Play Them.

We are nearly one month away from the West's greatest splurge on discretionary goods and Santa isn't the one bringing them into the Port of LA.

Catalyst

Due to the constant rhetoric that 'iNflaTIOn iz TranZuhToRY' and "no one saw it coming" many companies that have benefited greatly from the increased prices were discounted. Nobody wanted to invest in lumber, freight, and oil because these price hikes were supposed to be temporary. As many are now admitting, inflation is here to stay and so are the aforementioned companies' sick margins. The catalyst is a great repricing of undervalued companies. *Think Dr. Burry buying Gamestop at $5* We literally have boomer stocks growing revenues and margins at the rates of start-ups (more on that below*

Shipping Rates

As a result of the decreased labor force and QE, shipping rates have climbed close to 600% over the last year. However, recently they've plateaued and haven't shown any sign of returning to baseline.

From $ZIM

However, these rates are mostly just for freight from the East to the West. Prices are incredibly low if you'd like to ship the other way, "Shanghai-Los Angeles route was over $10,000 but under $1,300 in the reverse direction in the recent weeks".

Demand

Consumer spending continues to hit all-time highs and the Port of LA is jakkt to the tits in congestion with over 100 ships queued in a conga line 100 miles south.

https://preview.redd.it/q9hfrdebiz081.png?width=2636&format=png&auto=webp&s=844822e0824142df9b8d61f9c22a8f8f55e5a3b2

https://preview.redd.it/p7qqvzd7iz081.jpg?width=1300&format=pjpg&auto=webp&s=0b2707167e384e315aa1cd403099073ac1dffc21

The Play

Any shipping company seems mispriced, however, I see the greatest opportunity I see is with $ZIM. Here's the link to their latest earnings. *spoiler: they absolutely crushed it*. I have literally looked at the top 12 largest, publicly-traded shipping companies and this one seems to have the greatest mismatch on price:value.

Margins

$ZIM has one of (if not, the) highest margins of any shipping company in the industry with a 66% EBITDA margin (that's double $APPL).

Rate of growth

Whether it has been their shipping fleet acquisitions, the freight prices, or efficient logistics $ZIM has 18X'd their profit YoY.

https://preview.redd.it/tri9nglhkz081.png?width=2508&format=png&auto=webp&s=35275a8fb7642c2953228db9bf8b7be2c00d4c6b

Stock Performance

$ZIM went public in January this year and has averaged a 100% return every quarter. For a REAL company, this is unparalleled. They literally just go up and to the right.

https://preview.redd.it/ptd3omdjlz081.png?width=2522&format=png&auto=webp&s=81cc178b902e40d8a4002aff7948ff657e4d5166

Price Mismatch

After looking at the top 12 highest market cap shipping companies, $ZIM seems to be the most mispriced. The average PE of the shipping industry is ~6.9X (nice). While $ZIM trades @ 3.3X. Even if $ZIM were to normalize at the industry's average, that's over a 100% return. If you look at revenue, $ZIM brings in roughly 20% of Maersk's $AMKBY (the largest shipping company by MC) revenue while trading at ~10% of the valuation. If you were to normalize $ZIM (66% margin) with $AMKBY (41% margin) based upon net profit, you'd expect a 130% return from the current price of $57.

Comparison across some shipping companies.

The Next Run

After $ZIM completely destroyed their Q3 earnings ($12.16 vs $8.99 EPS) and announced a market-leading dividend (20% of quarter's net income with a 4th quarter dividend equal to 30-50% of annual net income), and heavy volume has started coming in over the last few days. People are starting to notice. If we assume a similar profit for Q4, their '21 annual profit is ~$4.5B. We know that based on shares outstanding divided by net income with a 20% dividend is $2.50. This means that their 4th quarter dividend (assumed at the midpoint of 40%) will be $15. At a current share price of $57, you'd basically get a 26% return just from a single dividend. If you don't think boomers and pensions that love dividends aren't going to jump into this stock then go YOLO into some weed stocks (RIP. Long $ROPE).

How to Play

$ZIM's ex-dividend date is Dec 15th so, if you'd like the dividend (like me) you'd have to get in before that date. If you think the stock will massively skyrocket from dividend investors, here's the options chain. You'll notice the most volume taking place at the $60 strike calls. These calls also have the greatest #gamma and could offer a great return with a breakeven price of $62.60.

https://preview.redd.it/187r26jnqz081.png?width=2574&format=png&auto=webp&s=a3f502b943a2717b68a7a813f87e02fb99a2d554

Positions

100 shares @ $57.50

*This is literally my uneducated, unlicensed opinion. Don't listen to me. You'll Lose money*

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