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ZTO Express (ZTO) Grapples With Cost Woes: Time to Dump?

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We have issued an updated research report on ZTO Express (Cayman) Inc. (ZTO - Free Report) on Aug 13. The stock has been downgraded to a Zacks Rank #5 (Strong Sell) from a Zacks Rank #3 (Hold). Going by the proven model, the Sell-rated stocks (#4 or 5) are likely to underperform the broader market over the next one to three months.

Reasons for the Downgrade

High-operating expenses have been putting pressure on the bottom line for quite some time, with second-quarter 2018 results being no exception. During the quarter, high selling, general and administrative costs led to a 32.5% rise in operating expenses to RMB 268.4 million. Increased operating expenses can also be attributed to increased salary and accrued bonus.

Furthermore, with the company making constant investments to expand portfolio, costs are likely to increase and dent the bottom line in the coming quarters.

Moreover, the company’s business suffers from stringent government regulations and strict policies of the Chinese market. Additionally, the domestic express delivery market is highly competitive due to the presence of big players like SF Express and STO Express.

The negativity revolving around the stock can be gauged from the Zacks Consensus Estimate being revised 13.6% downward in the last 30 days for current-quarter earnings. Moreover, shares of this China- based company have declined 6.1% over the past month, against the industry’s rise of 1.7%

The company’s unimpressive Momentum Score of F highlights short-term unattractiveness.

Stocks to Consider

A few better-ranked stocks in the broader Transportation Sector are Atlas Air Worldwide Holdings, Inc. , GATX Corporation (GATX - Free Report) and SkyWest, Inc. (SKYW - Free Report) . While GATX carries a Zacks Rank #2 (Buy), Atlas Air Worldwide and SkyWest sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Atlas Air Worldwide, GATX and SkyWest have gained 8.3%, 18.5% and 2% in the last six months, respectively.

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