ZTO Rockets Upwards. But Is There Reason to Worry?

Integrated Freight & Logistics company ZTO Express (Cayman) is standing out today, surging to $21.18 and marking a 8.9% change. In comparison the S&P 500 moved only 1.0%. ZTO is -40.07% below its average analyst target price of $35.35, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, ZTO Express (Cayman) has underperfomed the S&P 500 by 17.4%, moving -32.9%.

ZTO Express (Cayman) Inc. provides express delivery and other value-added logistics services in the People's Republic of China. The company belongs to the industrials sector, which generally includes cyclical companies -- with the exception of conglomerates whose business may span several industries. Cyclical companies experience higher sales during periods of economic expanision, and worsening outlooks during recessions.

ZTO Express (Cayman)'s trailing 12 month P/E ratio is 22.8, based on its trailing Eps of $0.93. The company has a forward P/E ratio of 15.7 according to its forward Eps of $1.35 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US industrials companies is 21.46, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

ZTO’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for ZTO Express (Cayman), we obtain a PEG ratio of 42.9, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

To better understand the strength of ZTO Express (Cayman)'s business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.

ZTO's gross profit margins have averaged 26.3% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -10.3%.

ZTO Express (Cayman)'s financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2021-12-31 7,220,217,000.0 -8,360,497,000.0 -1,140,280,000.0 50.13
2020-12-31 4,950,749,000.0 -7,237,302,000.0 -2,286,553,000.0 -237.04
2019-12-31 6,304,186,000.0 -4,635,685,000.0 1,668,501,000.0 54.46
2018-12-31 4,404,051,000.0 -3,323,822,000.0 1,080,229,000.0 n/a
  • Average free cash flow: $-169,525,750.00
  • Average free cash flown growth rate: -44.2 %
  • Coefficient of variability (lower numbers indicating more stability): 1096.4 %

If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for ZTO, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

ZTO Express (Cayman)'s P/B ratio of 0.3 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Industrials sector was 3.7 as of the third quarter of 2022.

ZTO Express (Cayman) is by most measures overvalued because it has an average P/E ratio, an exceptionally low P/B ratio, and an unconvincing cash flow history with a downwards trend. The stock has poor growth indicators because it has a an inflated PEG ratio and consistently average gross margins that are shrinking. We hope you enjoyed this overview of ZTO's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.