ZTO Express Cayman Inc. ZTO is facing significant challenges from rising operating expenses and a deteriorating liquidity position, which are adversely affecting the company’s bottom line and making it an unattractive choice for investors’ portfolios.

Let’s delve deeper.

ZTO: Key Risks to Watch

Southward Earnings Estimate Revision: The Zacks Consensus Estimate for current-year earnings has moved 7.1% south in the past 60 days. For the next year, the consensus mark for earnings has been revised 4.6% downward in the same time frame. The unfavorable estimate revisions indicate brokers’ lack of confidence in the stock.

Unimpressive Price Performance: ZTO Express Cayman shares have declined 5% in the past year compared with the industry’s 3.6% fall.Zacks Investment Research

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Weak Zacks Rank: ZTO currently carries a Zacks Rank #4 (Sell).

Bearish Industry Rank: The industry to which ZTO belongs currently has a Zacks Industry Rank of 181 (out of 247). Such an unfavorable rank places it in the bottom 27% of Zacks Industries.Studies show that 50% of a stock price movement is directly related to the performance of the industry group it belongs to.

A mediocre stock within a strong group is likely to outclass a robust stock in a weak industry. Reckoning the industry’s performance becomes imperative.

Headwinds: ZTO Express is under increasing pressure on its bottom line due to rising expenses, which are challenging its financial stability. In the fourth quarter of 2024, the company experienced a 14.3% year-over-year increase in total cost of revenues. This rise was largely driven by higher sorting hub operating costs and other related expenses. As a result, ZTO's overall operating expenses surged 17.3% compared to the previous year.

Labor costs played a significant role in this surge, with selling, general and administrative expenses rising 10.9% year over year. These labor-related costs totaled $368.5 million in the fourth quarter of 2024. The company is now grappling with the impact of these escalating costs, which are putting additional strain on its profitability and overall financial health.

This upward trend in expenses reflects broader cost pressures, especially in labor, which could continue to impact ZTO's bottom line if not managed effectively. The company will need to find ways to control costs or enhance revenue growth to maintain financial stability. The U.S.-China trade tensions may also hurt the prospects of this Chinese company.

Moreover, a downward trend in the current ratio for ZTO from 1.49 in 2022 to 1.34 in 2023 and further down to 1.07 in 2024 is indeed concerning as it questions the company’s ability to meet its short-term obligations.

Story Continues

Stocks to Consider

Investors interested in the Transportation sector may also considerSkyWest SKYW and Frontier Group ULCC.

SkyWest currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SKYW has an expected earnings growth rate of 16% for the current year. The company has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average beat of 16.7%. Shares of SKYW have risen 11.1% over the past six months.

Frontier Group sports a Zacks Rank of 1 at present. ULCC has an expected earnings growth rate of more than 300% for the current year.

The company has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed once. The average surprise is 1.1%. Shares of ULCC have rallied 18.9% in the past six months.

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ZTO Express (Cayman) Inc. (ZTO):Free Stock Analysis Report

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This article originally published on Zacks Investment Research (zacks.com).

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