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ZTO Express (ZTO) Plagued by Multiple Headwinds: Time to Dump?

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Though shares of ZTO Express (ZTO - Free Report) have gained 14.6% in a year’s time, the stock massively underperformed its industry’s 70.4% appreciation during the same time frame.

Let’s look at the factors responsible for this underperformance

Unimpressive Earnings Record:ZTO Express reported lower-than-expected earnings per share in three of the four quarters of 2020 (surpassing the Zacks Consensus Estimate for earnings in the other quarter). The average earnings miss is 15.5%.

This bottom-line underperformance is mainly due to high costs. Notably, selling, general and administrative expenses flared up 7.6% in 2020. Moreover, capital expenses surged 76.2% last year, thereby hurting the bottom line. Additionally, gross profit declined 11.8% year over year in the year on decline in average selling prices as a result of competition.

Unfavorable Earnings Estimate Revisions: The Zacks Consensus Estimate for current-year earnings has been revised 9.4% downward over the past 60 days. For 2022, the consensus mark for the metric has moved 14.1% south during the same time frame. Such unfavorable estimate revisions reflect brokers’ lack of confidence in the stock.

Given the wealth of information at the brokers’ disposal, it is in the best interest of investors to be guided by their expert advice and the direction of their estimate revisions. This is because the sameserves as a key indicator in determining the price of a stock.

Bearish Zacks Rank & Style Score: The stock currently carries a Zacks Rank #5 (Strong Sell). Moreover, the stock has a VGM Score of D.

Bearish Industry Rank: The industry, to which ZTO Express belongs, currently carries a Zacks Industry Rank of 145 (of 250 plus groups). Such a solid rank places the company in the bottom 43% of the Zacks industries. Studies show that 50% of a stock-price movement is directly tied to the performance of the industry group that it hails from.

In fact, an ordinary stock in a strong group is likely to outperform a robust stock in a weak industry. Therefore, taking the industry’s performance into consideration becomes imperative.

In view of the above headwinds, we believe investors should remove this Chinese stock from their portfolio now.

Stocks to Consider

Investors interested in the broader Zacks Transportation sector may consider Kansas City Southern , Triton International Limited  and Herc Holdings (HRI - Free Report) . Kansas City Southern carries a Zacks Rank #2 (Buy), while Triton and Herc Holdings sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term (three to five years) expected earnings per share growth rate for Kansas City Southern, Triton and Herc Holdings is projected at 15%, 10% and 31.2%, respectively.

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