Transportation is a “derived demand” sector, which means that requirement for transportation depends on the demand for products that transporters haul. It, therefore, acts as a leading indicator of the overall health of the economy.
The diversified transportation sector, which includes airline operators, railroads, truckers and shippers, to name a few, seems poised well for both the near and the long term due to robust freight demand on the back of a strong economy.
2019 Growth Picture
With the U.S. economy expanding for eleven consecutive years, the fortunes of transporters are also rising. The Dow Jones Transportation Average (DJT) has jumped 15.5% year to date. The iShares Transportation Average ETF (IYT) has surged 16.3% so far in 2019 while the SPDR S&P Transportation ETF (XTN) has soared a little above 15%. Substantial surge in manufactured goods, massive tax hauls and business-friendly policies should continue to support the sector’s growth.
Strong Industry Data
In March 2019, the Association of American Railroads, the industry body of the class 1 freight railroad operators, expressed optimism that rail traffic growth rate will continue in the near term. The most important growth driver will be the intermodal segment. Volumes at this key revenue-generating unit rose 2.1% to 266,200 for the week ended Mar 23.
In December 2018, the International Air Transport Association predicts global net profit of $35.5 billion for the industry in 2019. This is much higher than the profitability of $32.3 billion in 2018. This bright projection can be attributed to strong demand for air travel.
In its 2018 freight transportation forecast, the American Trucking Association has predicted that there will be persistent growth for truckers driven by manufacturing, consumer spending and international trade over the next 12 years.
Moreover, recent positive developments on U.S. –China trade conflict and decision of the Chinese authorities to stimulate the economy will act as the major catalysts for the shipping industry in 2019.
Positive Developments on Trade Front
International trade is an important metric for the transportation sector. On Mar 29, White House said that the trade-related negotiation between the United States and China made progress in Beijing last week. The two sides will meet once again in Washington this week to advance negotiations.
On Mar 27, Reuters reported that China has made unprecedented proposals on a range of issues including the protection of U.S. intellectual properties to resolve trade disputes. CNBC reported that China has committed to import $1.2 trillion of U.S. exports in the next 20 years.
Solid U.S. Economic Data
U.S. trade deficit narrowed to $51.1 billion in January 2019 from $59.9 billion in December. January’s trade deficit was the lowest in five months, reflecting the biggest monthly decline since March 2018. The consensus estimate was for a trade deficit of $57.4 billion. Exports rose by $1.9 billion to $207.3 billion. Imports declined by $6.8 billion to $258.5 billion. Higher exports mean increased demand for transporters.
On Apr 1, the Institute for Supply Management (ISM) reported that U.S. manufacturing expanded in March for the 119th consecutive month. The March index came in at 55.3, easily surpassing the consensus estimate of 54.5. Notably, the index for February was 54.2, the lowest level since November 2016.
Our Top Picks
At this stage, it will be prudent to invest in transportation stocks with a favorable Zacks Rank and strong growth potential. We have narrowed our search to five such shipping stocks each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows price performance of our five picks year to date.
Radiant Logistics Inc. RLGT operates as a third-party logistics and multi-modal transportation services company primarily in the United States and Canada. The company has an expected earnings growth rate of 62.1% for the current year. The Zacks Consensus Estimate for the current year has improved 6.8% over the past 60 days.
Pangaea Logistics Solutions Ltd. PANL provides seaborne dry bulk logistics and transportation services to industrial customers worldwide. The company has an expected earnings growth rate of 24.5% for the current year. The Zacks Consensus Estimate for this year has improved 3.1% over the past 60 days.
Saia Inc. SAIA provides regional and interregional less-than-truckload services and other value-added services, including non-asset truckload, expedited and logistics services. The company has expected earnings growth of 16.5% for the current year. The Zacks Consensus Estimate for the current year has improved 3.3% over the past 60 days.
Norfolk Southern Corp. NSC engages in the rail transportation of raw materials, intermediate products and finished goods of different industries including chemicals, agriculture, metals construction materials, coal, automobiles and automotive parts. The company has expected earnings growth of 9.6% for the current year. The Zacks Consensus Estimate for the current year has improved 1.8% over the past 60 days.
SkyWest Inc. SKYW operates a regional airline providing commercial air service in cities throughout North America. The company has an expected earnings growth rate of 9.1% for the ongoing year. The Zacks Consensus Estimate for the current year has improved 3.2% over the past 60 days.
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SkyWest, Inc. (SKYW) : Free Stock Analysis Report
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