The Zacks Transportation sector is widely diversified in nature, including airline operators, railroads, truckers, third-party logistics (3PL) companies and shippers.
This key sector gained 7.1% in the first half of 2019, despite adversities like increase in oil prices (up 28% in the first half), inclement weather conditions in the United States, driver shortages and other labor disputes.
The above-mentioned headwinds, notwithstanding, there are enough catalysts, which have resulted in the sector gaining in the January-June period. Let’s examine them in details.
Impressive U.S. Economy
Despite the trade squabble with China and other macroeconomic concerns, the U.S. economy is in good shape. This is highlighted by the fact that the three major stock indexes — the Dow, S&P 500 and Nasdaq Composite — grew 14.4%, 18.1% and 21.4%, respectively, in the first half of the year.
With the economy in such a healthy state, it is of little surprise that the transportation sector, whose fortunes are tied to macro factors like GDP growth, industrial production, construction volumes and trade, as well as consumer demand, witnessed growth in the first half of the year despite some challenges.
Uptick in Passenger Revenues
One of the key components of the sector is airlines. Driven by factors like affordable air fares, a much-improved job market and rising disposable income, airlines are witnessing robust growth in passenger revenues, which account for the bulk of top line of most carriers.
Adding to the enthusiasm, the industry trade organization, Airlines for America (A4A), recently announced that a record 257.4 million passengers are anticipated to take to the skies in the ongoing summer season (Jun 1-Aug 31), up 3.4% year over year.
Moreover, the bullish unit revenue projections from the likes of Delta Air Lines, JetBlue Airways JBLU and Southwest Airlines LUV, for the upcoming second-quarter 2019 earnings season, support the buoyant top-line picture surrounding airlines.
We expect passenger revenues to be strong in the second half of the year too. The bullish picture is supported by the anticipation of robust profitability for North American carriers in 2019 ($15 billion for 2019 compared with $14.5 billion in 2018).
Prudent Cost Management Aiding Railroads
In order to boost profits, more and more railroad companies are adopting the precision scheduled railroading model, an operating structure that reduces costs, enhances services and leads to optimal asset utilization. With increased efficiency and reduced costs, most railroads have shown consistent improvement in operating ratio (operating expense as a percentage of revenues), and hope for even better in the near future.
As an evidence, Norfolk Southern NSC expects this key metric to improve at least 100 basis points this year compared with 65.4% achieved in 2018. The lower the value of this efficiency measure, the better it is. Moreover, stocks in the railroad space are being aided by the healthy state of the U.S. economy. A strong economy is supporting the bullishness of railroad operators, with more goods being transported across the country.
Other participants of the transportation sector are also being aided by various factors. While the surge in online shopping is a positive for package delivery companies like FedEx FDX, factors such as low unemployment rates and healthy consumer spending act as a tailwind for Equipment & Leasing stocks. Similarly, service providers to transporters are being aided by a thriving economy.
Investing in Transports Prudent Now
With the U.S. economy expected to remain strong in the second half of the year as well and other tailwinds like e-commerce growth, we believe the transportation sector will do well in the second half of the year. Consequently, investing in stocks from the space appears to be prudent.
However, given the diversity in the space, selecting winning stocks is difficult for investors. To facilitate their search, we have zeroed in on four stocks, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Moreover, each of the stocks has been witnessing favorable earnings estimate revisions for the current year, indicating the positivity surrounding them.
JetBlue Airways is a low-cost airline company. The company, based in Long Island City, New York, has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 4.3% over the past 60 days. Moreover, current-year earnings are projected to grow at an impressive rate of 23.9%.
Green Plains Partners GPP is a provider of fuel storage and transportation services. The company is based in Omaha, NE. The Zacks Consensus Estimate for its current-year earnings has climbed 15.7% over the past 60 days.
Hertz Global Holdings HTZ provides airport and off-airport vehicle rental and leasing services. The Zacks Consensus Estimate for its current-year earnings has climbed 56.9% over the past 60 days. The company’s expected earnings growth rate for the current year is well over 100%.
Hawaiian Holdings HA, the parent of Hawaiian Airlines, is headquartered in Honolulu County, HI. The Zacks Consensus Estimate for its current-year earnings has risen almost 1% over the past 60 days.
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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
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