One of the leading economic indicators for a recovering economy is the transportation of goods at home, and abroad. In Q1 2014, the U.S. GDP contracted -2.9%, after a +2.6% growth in Q4 2013. The Q1 drop was mainly blamed on the horrible weather in the U.S. and North America. Overall, the weather was blamed for negative numbers in shipping, construction, production, home and auto sales just to name a few. Essentially, any company who did not reach their estimates blamed the weather in Q1 2014.
So going into Q2, analysts were looking for indications that the weather was really the culprit, and not a function of a slowing economy. And it appears as though, the weather was really the catalyst of the bad earnings in Q1.
Transportation Crushes Estimates in Q2
Transportation stocks blew expectations out of the water in Q2! The YTD price change for the sector jumped +10.7%, the 52 week price change leaped up 32.2%, while year over year earnings growth rose 11.5%. Further, just over 81% of the 11 companies that comprise the Zacks Transportation Sector posted positive Earnings, and Revenue beats.
The sector saw gains in hopper rail cars, manufacturing, leasing, services, earnings from operations, and a decline in SG&A (expenses rose due to the weather in Q1). All these factors enabled the sector post strong gains during the quarter.
In the second half of the year, the Transportation sector is expected to show 8.57% growth in total earnings, and jump up a massive 25.7% growth in total earnings in Q1 2015.
Picking the Right Transportation Stocks
While the sector as a whole is outperforming the market, there are 3 companies that we have identified as well positioned to accelerate earnings growth through 2014, and into 2015.
Greenbrier Cos Inc. (GBX - Snapshot Report) a Zacks Rank #1 (Strong Buy) destroyed the Zacks Consensus Earnings Estimate of $0.74 for Q3 by posting an EPS of $1.03. Further, the company solidly beat the Zacks Consensus Revenue Estimate by $21 million. The company also saw margins expand at 16.3%, while management expected only 13.5% expansion. Most importantly, GBX’s order book experienced a massive increase; Q3 orders jumped up to 15,600 from only 5,800 the previous quarter, increasing revenue from $1.54 billion to $2.75 billion. Further indications are that orders have continued to come in at an accelerated pace for Q4.
Due to the strong Q3 showing, the Zacks Consensus Earnings Estimates for Q4, FY 14, and FY 15, have all increased in the past 60 days; Q4 rose from $0.87 to $1.02, FY 14 increased from $2.62 to $3.07, and FY 15 jumped from $3.25 to $4.00.
Trinity Industries Inc. (TRN - Snapshot Report) a Zacks Rank #1 (Strong Buy) saw their seventh consecutive earnings beat in Q2, by posting an EPS of $1.01, way ahead of the Zacks Consensus Earnings Estimate of $0.76. Further, the company beat the Zacks Consensus Revenue estimate by $118 million. The main catalysts behind the earnings beat were an increase in their order backlog, recovery in North America which benefits their non-rail segments, Construction, Barge, and Energy, and broadening in the rail cycle. The solid earnings beat caused management to increase guidance for FY 14; EPS is now expected to be in the range of $3.90-$4.10 from a range of $3.50-$3.75. Management is probably being conservative with their estimates, because of the improving volumes, solid operation metrics, and EBIT margin expansion (Q2 saw margins expand 20.3%, almost 300 basis points, and is expected to continue to grow through the end of 2014).
All of this positive news caused the Zacks Consensus Earnings Estimates for Q3, Q4, FY 14, and FY 15 during the past 60 days. Q3 estimates rose from $0.77 to $0.82, Q4 increased from $0.81 to $0.85, FY 14 jumped up to $4.06 from $3.72, FY 15 rose from $3.41 to $3.91.
Aircastle Ltd (AYR - Snapshot Report) a Zacks Rank # 2(Buy) was another company that posted very strong earnings in Q2 2014. EPS came in at $0.57, destroying the Zacks Consensus Earnings Estimate of $0.12. The company also beat the Zacks Consensus Revenue Estimate by $43 million. The company saw increases in Lease revenue (+15% YoY), Aircraft demand (sold 17 planes in Q2, with plans to sell another 3, 747 freighters by years end), and ROE (highest in several years). During the quarter the company was able to decrease the average age of their air fleet from 9.1 years to 8.6 years. This was due to the sale of older aircraft, and the addition of newer planes.
Due to all this positive news, the Zacks Consensus Earnings Estimates for FY 14 and FY 15 have increased over the past 30 days. FY 14 has increased from $1.02 to $1.27, and FY 15 has risen from $1.58 to $1.82.
The weather in the first part of the year hampered the earnings and revenues for Transportation stocks, but once the weather cleared, the sector exploded, and posted massive earnings and revenue beats. With the improving economy, the Transportation sector is primed to reap the benefits. So if you are inclined to invest in the Transportation sector, you should consider these stocks for your portfolio.