The transportation sector (one of the 16 Zacks sectors) has made a strong start to the Q3 season in spite of the multiple headwinds it currently faces. Leading sector participants like Delta Air Lines Inc. (DAL), CSX Corporation (CSX) and United Continental Holdings (UAL) reported better-than-expected earnings in the quarter, thereby raising optimism among investors.
According to the Zacks Earnings Trends report, transportation companies that have reported till Oct 14 have outperformed on the earnings front. However, this sector – comprising airline companies, truckers, shippers and railroads to name a few– is unlikely to continue the momentum till the very end of the current earnings season. According to the report, the bottom line earnings for the sector is expected to decrease by 19.8% in Q3, making it as one of eight Zacks sectors that are likely to exit the quarter with a year-over-year decline in earnings.
The worst performer, as has been the case in the last few quarters, is again likely to be the Energy sector. In fact, this sector is expected to witness bottom-line deterioration of 71.9% in the current reporting cycle. Despite the improvement in pricing this year as well as the OPEC’s surprise decision last month to curb production for the first time since 2008, oil continues to trade below $55 a barrel – nearly half the level reached two years ago.
Nonetheless, low oil prices have been a godsend for transportation players as fuel is one of the major input costs for any company in the space. Given that oil prices have been low for more than two years, it is natural that this major tailwind has already been accounted for and priced in. Despite its waning impact, cheap oil remains one of the major growth drivers for the transportation sector.
As noted earlier the transportation sector is poised to take a beating in Q3 thanks to the multiple headwinds that the sector faces. The challenges include declining travel demand due to security concerns associated with more frequent terrorist attacks, Brexit induced uncertainty, declining coal shipments and driver shortages, to name a few. The limited impact of cheap oil is also unfavorable for transportation players.
The bearish Zacks Industry ranks of most of the 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 226, 242, 213 and 236, respectively among more than 260 groups.
Is an Earnings Beat Likely?
Despite the tough times the entire sector is going through, registering an earnings beat should not be a very difficult for some of the sector participants. This is primarily because the plethora of issues in the sector have resulted in earnings estimates moving south for quite some time owing to multiple downward revisions. Consequently, the Zacks Consensus Estimate for the third quarter is quite conservative and much lower in most cases than the comparable year-ago figure. For example, the Zacks Consensus Estimate for American Airlines Group’s (AAL) third quarter of 2016 earnings is $1.66 per share, much lower than the year-ago figure of $2.72.
How to Select the Potential Winners?
Given the widely diversified nature of the transportation space it is a daunting task to select stocks that have the potential to outperform in the current earnings season. The headwinds faced by these companies make the job picking the attractive stocks even tougher. This is where the Zacks methodology shows its mettle. According to our quantitative model, stocks having a combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP are likely to report better-than-expected earnings. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. An earnings beat more often than not boosts investor confidence in the stock, which translates into rapid price appreciation.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our first choice is Fort Worth, TX-based American Airlines Group (AAL). The carrier operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe from its hubs. The carries a Zacks Rank #3 and has an earnings ESP of +3.01%. The favorable combination makes an earnings beat likely for this airline behemoth. The carrier is scheduled to reveal quarterly results on Oct 20.
Swift Transportation Company (SWFT), based in Phoenix, AZ, also makes it to our list of potential outperformers. The company, which operates one of the largest fleets of truckload equipment in North America from more than 40 terminals near key freight centers and traffic lanes, has an Earnings ESP of +3.13% and a Zacks Rank #3. The company is slated to announce its financial numbers on Oct 24.
GasLog Partners LP (GLOP), based in Monaco, is also likely to outshine with respect to the bottom line in the third quarter, results of which will be revealed on Oct 27. The company, which owns, operates and acquires LNG carriers with multi-year charters, has an Earnings ESP of +1.82% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
YRC Worldwide Inc. (YRCW), the holding company for a portfolio of less-than-truckload companies including YRC Freight, YRC Reimer, Holland, Reddaway and New Penn, is also likely to report better-than-expected earnings in the third quarter. The company, based in Overland Park, KS, has an Earnings ESP of +6.82% and a Zacks Rank #3. The company’s quarterly results are scheduled to be announced on Oct 27.
The final member in our list potential outperformers is the Long Island City, NY-based low cost carrier, JetBlue Airways Corporation (JBLU). The carrier transports more than 32 million customers annually to over 80 cities in the U.S., Caribbean and Latin America. The company has an Earnings ESP of +1.70% and a Zacks Rank #3. Its results are scheduled to be announced on Oct 25.
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