ZTO Express Remains Unrespected
When we think of the e-commerce segment in China, investors immediately think of heavyweight Alibaba Group Holding Ltd (NYSE:BABA), which sends over 26 billion parcels a year in China. The thing is, those parcels need to be delivered.
In China, major carriers like United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX) are irrelevant, meaning that this lucrative space is largely fragmented and dominated by a few big players, with ZTO Express (Cayman) Inc (NYSE:ZTO) as the leader.
ZTO Express has a market cap of close to $11.0 billion, which pales in comparison to FedEx’s $65.0 billion and UPS’s $90.0 billion.
What makes ZTO Express intriguing is that the company adapts innovative technologies to operate its massive supply chain, including robots, hardware, and software.
Yet, despite serving around 95% of the Chinese market, ZTO stock has underperformed the S&P 500 with a gain of 6.60% over the past 52 weeks.
Down from the 52-week high of $18.08 in November 2017, ZTO Express stock is undervalued and deserving of a closer look.
Chart courtesy of StockCharts.com
On the chart, ZTO stock is trading just below its trend line but is holding above major technical support at $14.70, with a chart target of $17.50 and $18.00. A break could see ZTO stock make a move to above $20.00 and higher, if the company can deliver.
Why ZTO Stock Deserves a Higher Value
The growth in revenues, earnings, and gross margins have been impressive and the trend is estimated to continue.
ZTO Express recorded 55% and 61% revenue growth in 2015 and 2016, respectively.
The revenue growth is predicted to be 30.5% to $2.01 billion in 2017 followed by 27.4% to $2.56 billion and as high as $2.84 billion in 2018. (Source: “ZTO Express (Cayman) Inc. (ZTO),” Yahoo! Finance, last accessed February 21, 2018.)
I wouldn’t worry too much about the lower revenue growth rate because the growth is much higher than FedEx and UPS.
Earnings estimates have been on the rise, which is a bullish signal. After recording $0.44 per diluted share in 2016, ZTO Express is expected to earn $0.66 per diluted share in 2017 and ramp it up to $0.88 to $0.96 per diluted share in 2018.
The balance sheet reflects a cash-rich company with about $1.69 billion in net cash. The strong financial position will allow ZTO Express to continue to strengthen its delivery network by spending on capital expenditure and technology.
Considering the growth and the fact that ZTO Express is a leading player in the fragmented China delivery segment, the stock looks attractive, especially given the tailwinds in the China e-commerce segment powered by 400 million middle-class consumers.