2 Transport Stocks to Bet on as Curtains Fall on Q2 Earnings
The widely diversified transportation sector, which includes airline companies, truckers, shippers and railroads, to name a few, is facing a number of headwinds like surge in terror attacks, Brexit vote uncertainty, declining coal shipments and labor problems. Most of the sector participants, including all the S&P 500 transportation players, have revealed their quarterly numbers.
According to our latest Earnings Trends report, year-over-year earnings growth for the transportation players in the S&P 500 space is -12.4% year over year which cuts a sorry picture compared to the first-quarter 2016 growth of +3.3%. As per the report, the top line has shrunk 1.3% in Q2 whereas in 1Q revenues decelerated 0.9% on a year-over-year basis.
Earnings Beats Fail to Drive Stocks
Despite the sluggish year-over-year growth rates, the Q2 earnings season has seen a healthy proportion (66.7%) of the S&P 500 companies beating the Zacks Consensus Estimate for earnings. Important sector participants like Delta Air Lines (DAL), American Airlines Group (AAL), JetBlue Airways Corporation (JBLU), Ryder System (R) and Norfolk Southern Corp. (NSC) have outperformed with respect to the bottom line.
Despite the earnings outperformance, the stock prices of the concerned players have remained subdued and most of the transportation players continue to have bearish Zacks Ranks. For example, Delta, despite the earnings beat, continues to carry a Zacks Rank # 5 (Strong Sell) while JetBlue and Ryder System still carry a Zacks Rank #4 (Sell) each. Moreover, the Zacks Consensus Estimate for the second quarter of 2016 earnings was much lower for most players than a year ago following a series of downward revisions by analysts, thereby making an earnings beat easier. For example, the Zacks Consensus Estimate for American Airlines’ second quarter of 2016 earnings was $1.65 per share, much lower than the year-ago figure of $2.62.
In view of the above scenario, it is of little wonder that the earnings beats did little to boost the stock prices despite the bottom-line outperformance.
Oil Prices Not as Low
Low oil prices act as a major tailwind as it represents one of the major input costs for any transportation company. Oil prices have been weak for over two years now. Thus, it is no surprise that analysts have accounted for this while arriving at their estimates for earnings.
Although it is true that the current oil prices of just over $40 a barrel are way off the $100+ mark witnessed in mid-2014, prices have bounced back from the 12-year low of $26.21 touched in February this year. This is also not good news for transportation players.
Zacks Industry Ranks for Sub-groups
The bearish Zacks Industry ranks of the different sub-groups of the transportation industry are also reflective of the headwinds confronting the space. For example, the Transportation-Airline, Transportation-Truck, Transportation-Ship and the Transportation-Equipment &Leasing units carry a bearish Zacks Industry rank of 247,253, 206 and 237, respectively among the 260+ industries.
How to Pick the Winners?
Given the tough times confronting the sector and the large number of participants in the transportation industry, it is by no means an easy task to shortlist stocks that have the potential to beat earnings. This is where the Zacks proprietary methodology comes in handy. It narrows down the list by helping select stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. It helps in choosing stocks that have high chances of posting a positive earnings surprise in their next earnings announcement. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. Here, we have selected two stocks from the transportation sector with the right combination of elements to report an earnings beat this season.
Transport Stocks Likely to Outperform
With the help of the above methodology, we have identified 2 transportation stocks likely to trump the Zacks Consensus Estimate for earnings in the second quarter of 2016.
LATAM Airlines Group S.A. (LFL) based in Santiago, Chile, offers domestic and international passenger and cargo air services. The carrier is likely to beat the Zacks Consensus Estimate in the second quarter of 2016, with results expected to be revealed on Aug 11. LATAM Airlines’ second-quarter earnings ESP of over +100% and Zacks Rank #3 make it our first choice.
Star Bulk Carriers Corp. (SBLK) is a Greece-based leading global shipping company in the dry bulk sector. The carrier is likely to beat the Zacks Consensus Estimate in the second quarter of 2016, with results expected to be revealed on Aug 29. Star Bulks’ second-quarter earnings ESP of over +13.33% and Zacks Rank #2 make it a potential outperformer.
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LATAM AIRLINES (LFL): Free Stock Analysis Report
STAR BULK CARRS (SBLK): Free Stock Analysis Report
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