One of the hottest sectors at the moment is transportation. And for the most obvious reasons.

Because this year is expected to be another big one for goods sales, even if they are a different type of goods that individuals and companies are buying.

Last year, people were buying to stay at home, and this year they are buying to get out. And then there’s some overlap between the two.

And no matter what people want to buy, if it’s a good, it has to be transported. And if it’s a service that depends on goods, like for example, the beauty and salon segment, then those goods need to be transported as well. If it’s hotels and restaurants that need to renovate and redo stuff with the pandemic in mind, there again is the need to transport something.

And it doesn’t end there. Because after all, it isn’t just the retail stuff that gets transported, but also other things like construction materials. And we all know how strong that market has been of late. Biden’s infrastructure plan will add further fuel to this fire. Not to mention the manufacturing sector, which requires transport of both raw materials and finished goods.

So no matter where you look, there is something that needs to be transported, or has been transported. Therein lies the importance of the sector and the reason it is so hot at this time.

Of course, it is not without challenges, the most important of which are capacity constraints, both on account of the number of vehicles available and the number of drivers available. And since the driver population is rather aged, there’s the secular concern that drivers will remain in short supply in the foreseeable future.

But the key to bringing more people into employ is simply by raising their pay, which transportation companies should not have difficulty with, considering that the constrained capacity allows them to charge higher rates.

As may be expected, this potential was not lost on investors, who had been buying into these names through most of the past year. But the enthusiasm has cooled off in the last couple of months on fears of an interest rate hike and the impact it could have on businesses, as well as renewed concern on the delta variant that could put breaks on the current growth trajectory.

And this is exactly why some of these stocks are now going really cheap. Especially with respect to their forward sales.

The quality of a company’s earnings generally depends on its ability to grow revenue/sales. That’s because there’s a limit to profitability enhancements from efficient cost management. At the end of the day, sustained growth isn’t possible without revenue growth.

So let’s look at a few transportation stocks that are showing attractive growth rates at attractive valuations-

Ryder System, Inc. (R Quick QuoteR - Free Report)

Florida-based Ryder System is recognized as one of the world's largest providers of integrated logistics and transportation solutions. Ryder’s customers range from small businesses to large international enterprises and are spread across a large number of industries, the most significant of which are automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing. It operates through the Fleet Management Solutions (FMS), Supply Chain Solutions (SCS) and Dedicated Transportation Solutions (DTS) segments.

The Transportation - Equipment and Leasing industry to which it belongs is in the top 14% of Zacks-classified industries, which along with its Zacks #1 (Strong Buy) rank and Value and Growth Scores of A are strongly indicative of upside potential in the near term.

The company beat June quarter estimates by 80.5% and its 2021 estimates have jumped 21.2% in the last 30 days. Not only that- its 2022 estimates have also jumped 16%. The FMS segment is by far the largest segment, contributing 59% of revenues in the last quarter.

Consequently, despite the 49% growth in the supply chain business, it is FMS that remains the biggest driver. Within FMS, management is optimistic about continued improved used vehicle sales results from strong demand and limited market inventory, better pricing in the lease and commercial rental businesses, and strong demand in commercial rental as the economic outlook continues to improve.

Ryder is on track to generate earnings of $7.16 a share, which is up from a 27cent loss in 2020. It is currently expected to grow again the following year.

Most encouragingly, its sales are expected to grow both this year and in the next. And its current valuation of just 0.44X shows that investors are undervaluing its prospects.

ArcBest Corp. (ARCB Quick QuoteARCB - Free Report)

ArcBest is a provider of a broad range of transportation services including motor carrier freight; business-to-business air transport and ocean transport. It also offers certain premium services to government and commercial customers, as well as globally customizable supply chain solutions and integrated warehousing services.

The Transportation – Truck industry to which it belongs is at the top 16% of Zacks classified industries, and like Ryder, it has a Zacks #1 rank with an A for both Value and Growth.

But if you have any doubts about its current strength, it’s numbers pretty much speak for themselves-

The company beat estimates by 23.1% in the last quarter reported on Aug 2. And it isn’t a one-off thing: the average surprise in the last four quarters is 40.8%.

The results were driven by strength in the asset-based business as a result of limited capacity and increased demand, particularly for the unseasonal movement in household goods. Management also mentioned that ”second quarter hiring initiatives were successful and should produce future benefit.” And this is particularly encouraging given the tight environment.

The asset-light business on the other hand saw increased demand for expedite service and managed logistics solutions, including from new accounts. Strong demand and robust rates drove the strength in the quarter.

Additionally, analysts are quite bullish on the company since they’ve all been raising estimates over the past few months with none moving the other way. And in the last 30 days, 2021 estimates have been raised by an average 12.6% while 2022 estimates were raised 9.7%.

ARCB is currently expected to grow earnings 80.2% in 2021 and 2.7% in 2022. But if the current sentiment holds up, there will be several more upward revisions.

Moreover, revenue growth is currently expected to be 20.8% in 2021 and 4.8% in 2022.

Investors are however valuing the company at just 0.48X sales, which looks unjustified given the growth outlook.

Covenant Logistics Group, Inc. (CVLG Quick QuoteCVLG - Free Report)

Covenant provides transportation and logistics services in the U.S. through its Expedited, Dedicated, Managed Freight (sharing freight load with carrier partners and providing logistics services on contractual basis) and Warehousing segments.

CVLG is also ranked #1 and has Value and Growth Scores of A. It belongs to the same industry as ARCB.

In the last quarter, the company topped estimates by 50.0%, taking the four-quarter average surprise to +33.1%. This was possible despite the sluggishness of the Dedicated business, which mainly consists of long-term contracts where it’s harder to pass on rising costs to the customer.

Management expects improvement in the third quarter as new customers are acquired at more favorable rates and more old customers enter into new agreements. The Managed Freight segment was particularly strong, capitalizing on industry dynamics.

Analysts responded by raising the 2021 and 2022 earnings estimates by a respective 21.4% and 14.7%. As a result, the company is expected to grow earnings by 194.4% this year and 5.1% in the next.

Revenues are currently expected to grow 18.0% and 4.8% in the two years, respectively. And the 0.38X P/S valuation multiple shows that prices have not kept up with the improving outlook.

Daseke, Inc.

Daseke, which calls itself “the largest flatbed, specialized transportation and logistics solutions company in North America” provides fleet management, logistics, trucking and open deck transportation services in the U.S.

The Zacks #2 (Buy) rated stock is at the top 34% of Zacks classified industries. Like the others, DSKE also has an A for both growth and value.

With the June quarter results beating estimates by 444.4%, the four-quarter average surprise is now +1052.8%. The strength is of course largely on account of softness last year, but since estimates are still so far off, it does appear that the big earnings surprises will continue through the year.

The company’s freight business is divided between its own trucks and owner operated trucks. But the Specialized Solutions segment uses fewer owner-operated trucks than the Flatbed Solutions Segment. It also has a higher rate and therefore generates more revenue per truck.

The specialized business saw a negative mix effect in the last quarter as stronger construction, high security cargo and glass largely offset reduced activity in the wind energy market. However, the net result was positive because of the increase in the number of miles.

Rates returned to pre-pandemic levels in the Flatbed segment, helped by strength in construction, steel and other construction metals. This offset the impact of shifting to an asset light model and fleet downsizing.

Unsurprisingly, the 2021 estimate jumped from 17 cents to 80 cents in the last 30 days. The 2022 estimate was equally encouraging, jumping from 42 cents to 96 cents. The increased estimates represent earnings growth of 3,900% and 20.6% in the two years, respectively. Revenue growth is currently expected to be 6.5% and 6.3%.

At 0.38X sales, this stock too is grossly undervalued.

3-Month Price Performance

Image Source: Zacks Investment Research