Stock Trade of the Week: ZTO Express (ZTO)

ZTO Express (NYSE: ZTO) – ZTO Express is based in Shanghai, China where it was founded in 2009. The company provides express delivery services to customers in China along with other logistics services. The company operates a fleet of over 3,600 trucks to service customer’s delivery needs. Clients include e-commerce companies as well as traditional retail merchants.

ZTO’s earnings have been growing at a rapid pace with the company seeing average EPS growth of 52% annually over the last three years. The most recent quarter showed earnings growth of 53% and analysts expect the company to grow earnings by 21% for 2018.

Sales growth has kept pace with the earnings growth.

Over the last three years the average annual growth rate has been 46% and in the most recent quarter sales grew by 45%.

Looking at the company’s profitability measures, the profit margin is at 26.2% and the operating margin is at 26.7%.

The return on equity isn’t as high as the margins, but it is still a respectable 15.8%.

The sentiment toward ZTO is mixed. Analysts are very bullish toward the stock with 13 out of 15 analysts rating the stock as a “buy”.

There is also one “hold” rating and one “sell” rating. On the other hand, the short interest ratio is at 4.51 and that is higher than I expected for a company that has performed as well as ZTO.

The chart for ZTO shows how the stock has pulled back in the last few months, like most other Chinese companies have. The difference with ZTO is that it found support at its 52-week moving average. There is also a second layer of support in the $17.50 area. The stock struggled to move above this area in late 2017 and now the former high should act as support.

Suggested strategy: Buy ZTO with a maximum entry price of $18. I would set a target of at least $24 over the next 12 months (for a potential return of 35%-plus from current prices). I would suggest using the 52-week moving average as a stop-loss point and shut down the trade if the stock closes below the trendline.

— Rick Pendergraft

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