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Freight Scene is Picking Up: 3 Transportation Stocks in Focus

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The Transportation sector is widely diversified with railroad operators, trucking companies and airlines as its few key components. It is a well-known fact that the sector is dealt a huge blow by the ongoing coronavirus pandemic. Depressed freight revenues due to lackluster volumes have been one of the many headwinds afflicting the sector so far. The COVID-19 outbreak crippled the shipment of goods not only across the United States but also globally.

As a consequence, freight revenues at the railroad operator Union Pacific Corporation (UNP - Free Report) declined 13% in the first nine months of 2020, mainly due to coronavirus-induced depressed volumes (down 10%). The story paints a dismal picture for another railroad operator Norfolk Southern Corporation (NSC - Free Report) as well. Overall volumes fell 7% in the first nine months of 2020 with volumes declining 15%, 9% and 41% in the three reportable segments, namely merchandise, intermodal and coal, respectively. At CSX Corporation (CSX - Free Report) , total volumes contracted 8% in the first nine months of 2020, mainly due to reduced industrial activity.

Freight Scenario on the Mend

However, with the gradual reopening of economies, the freight scenario has been improving in North America for a while now. After months of coronavirus-induced disruptions, freight volumes are gradually expanding. The recovery in freight demand following the ramp-up of economic activities as restrictions get relaxed is a boon for the concerned transportation companies.

Per the latest Cass Freight Shipments Index report, shipment volumes inched up 2.4% on a year-over-year basis. Notably, this was the first time that the metric has showed an improvement year over year since Nov 2018 when growth was merely 0.6%. In fact, the year-over-year betterment in shipment volumes during October 2020 was the best reading since 6.2% growth was registered in October 2018.

Even though the last month’s reading displayed year-over-year growth, the gradual recovery in the freight scenario can be gauged from the fact that shipment volumes have been displaying an uptick on a month-over-month basis over the past few months. Evidently, the metric improved 1.6% in May from April levels.Readings in June, July, August, September and October improved 3.5%, 4.8%, 8%, 7.1% and 0.3%, respectively, month over month.

Union Pacific’s commentary at the Stephens Annual Investment Conference earlier in the month bears testimony to the improved scenario with respect to overall volumes. Management stated that overall volumes for the December quarter are up 3% through Nov 11. Overall volumes rose on strength in the premium segment (up 11%).

This resurgence in the freight scenario can be attributed to healthy consumer spending with US retail sales on the rise. Notably, retail sales increased 5.2% year over year in October 2020. Improvement on a year-over-year basis with respect to rail volumes was also witnessed in the month. Per the Association of American Railroads’ report, total U.S. rail traffic in October this year was 2,082,646 carloads and intermodal units, up 2% from the October reading last year.

Moreover, for the third quarter of 2020, U.S. real GDP increased at an annual rate of 33.1%, per the "second" estimate released by the Bureau of Economic Analysis. This marks a rebound from a 31.4% plunge in the second quarter. With the domestic economy gaining an impetus, freight activity is naturally boosted.

3 Stocks to Focus on

With the U.S. economy on the mend, courtesy of tailwinds like a ramp-up in the industrial activity, the freight scenario is looking up. To leverage this brighter scenario, we present three companies that investors should watch out for.

Knight-Swift Transportation Holdings (KNX - Free Report) : This Phoenix, AZ-based provider of multiple truckload transportation and logistics services currently sports a Zacks Rank #1 (Strong Buy). The company recently gave an upbeat earnings per share outlook for 2020.

The company expects adjusted earnings per share in the band of $2.68-$2.72 (previously $2.15-$2.30) for the full year. Improving freight conditions might have led to this bullish outlook. The company expects such bright freight conditions to continue. The Zacks Consensus Estimate for 2020 earnings has been revised 24.9% upward in the past 60 days.

You can see the complete list of today’s Zacks #1 Rank stocks here

Landstar System (LSTR - Free Report) : Based in Jacksonville, FL, the company provides integrated transportation management solutions to customers throughout the United States, Canada, Mexico as well as other countries in North America. Gradual recovery in the freight scene is a boon to the company, currently carrying a Zacks Rank #2 (Buy).

It has been witnessing an expansion in trucking volumes over the past few months, owing to which it reported better-than-expected earnings per share and revenues for the third quarter of 2020. The Zacks Consensus Estimate for 2020 earnings has been revised 17.5% upward in the past 60 days.

Norfolk Southern Corporation: This Norfolk, VA- based railroad operator carries a Zacks Rank #3 (Hold), currently. The Zacks Consensus Estimate for 2020 earnings has moved 3.4% north in the past 60 days.

The company is benefiting from brighter intermodal and automotive volume on the back of gains in the consumer-driven markets. It expects its consumer-oriented marketsto remain strong, thereby driving growth.

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