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Shares of the major transportation companies surged on Dec 4. The uptick was primarily due to the Senate’s approval of the biggest U.S. tax overhaul in three decades by a 51-49 vote in the early hours of Dec 2.

Consequently, the Dow Jones Transportation Average — a price-weighted average of 20 U.S. transportation securities — ended the day 1.8% higher, thereby closing at 10,368.58. The Index includes railroads, truckers, marine transportation, delivery services and logistics companies, apart from the airlines. Hence, the Dow Jones Transportation Average Index can easily be considered as a true representative of the U.S. transportation division.

With the Dow Jones Transportation Average Index performing exceptionally well, it was no surprise that most participants had a field day. In fact, stocks like FedEx Corp. (FDX - Free Report) and United Parcel Service (UPS - Free Report) that dominate and define the Zacks Air Freight and Cargo Industry gained 3.6% and 2.8% on the day, thereby hitting their respective 52-week highs of $239.05 and $123.02.

Other notable gainers from railroads include — Union Pacific Corp. (UNP - Free Report) (up 4.4%) and Norfolk Southern Corp. (NSC - Free Report) (up 1.7%) — and from airlines — Southwest Airlines (LUV - Free Report) (up 3.5%), JetBlue Airways Corp. (JBLU - Free Report) (up 3.1%) and Alaska Air Group (ALK - Free Report) (up 2.1%).

All the above-mentioned stocks with the exception of FedEx and Alaska Air Group carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Tax Bill

With the Senate clearing its version of the tax reform bill, President Donald Trump has secured his first major legislative win after more than 10 months in office. We note that the House had passed its version of the tax bill in mid-November. The $1.5 trillion tax overhaul package is expected to be enacted into law by year-end, following resolution of the differences in the two versions.

As various market watchers seem to debate over the pros and cons of the tax reform bill, we expect transportation stocks in the United States to be a major beneficiary. The optimism was reflected by the buoyant performance of the sector participants in the stock market on Dec 4.

Both versions propose to reduce corporate taxes from the current 35% to 20%. On materialization, this huge reduction will naturally benefit transportation stocks in the United States. Most sector participants book a significant part of their revenues, domestically. Therefore, the 15-point cut in corporate tax rate should boost cash flow, which in turn will aid their bottom lines.

The proposal aims to provide incentives to companies to repatriate accumulated profits from overseas with an even lower tax rate than they otherwise would’ve shelled out. Currently, if foreign income is repatriated, it is taxed at 35% with a full credit of the local levies.

Capital Expenditures

Transportation stocks — mainly railroads and airlines — invest significantly for capital expenditure as the industry is capital-intensive in nature. For example, Union Pacific has announced a $3.1 billion capital plan this year, which is in line with its efforts to promote safety and enhance productivity.

In the current scenario, capital expenditures cannot be tax-deducted in the year they are incurred. Consequently, U.S. companies need to plan judiciously regarding their capital expenditure. However, companies will be able to deduct their capital expenditures from taxable income immediately, as per the provisions of the tax reform bill. Naturally, this aspect of the bill hugely favors transports and if it materializes companies in the space would be huge gainers.

In the event of companies being able to deduct capital expenses in the year of their occurrence, their tax bills for the year would be lowered significantly due to higher deductions. This will leave more cash in the hands of these companies to fund their capital expenditures, acquisitions, share repurchases among others.

Picture for Airlines

Apart from railroads and package delivery companies, stocks belonging to the airline space also are expected to be huge benefactors from the U.S. tax overhaul. The capital-intensive nature of the industry implies that the above-mentioned benefits pertaining to capital expenses should aid carriers as well.

Since most airline companies are almost entirely exposed to the statutory corporate tax rate, the massive tax cut is expected to help them save a considerable amount in tax payment in the United States.

In fact, most market watchers believe that the tax cut would benefit low-cost carriers like Alaska Air and JetBlue Airways more than the legacy carriers. This is because the likes of Delta had emerged from bankruptcy a few years ago. Consequently, their current incomes are still being offset by prior losses. Naturally, they do not stand to be benefitted immediately (tangibly) by the tax cuts. However, their smaller rivals like JetBlue are immediate gainers from the tax cuts as they were paying higher taxes till now.

Price Performance

Following the recovery from the negative effects of the back-to-back natural calamities stocks in transportation space have been performing well recently. Additionally, an  improving economy, a much-improved job market and rising disposable income have been a blessing for the sector participants. Also, consumer confidence remains strong resulting in more Americans going on vacations.

The fact that things are looking up for transports can be gauged from the fact that the Zacks Transportation industry has outperformed the S&P 500 Index over the last month. While the industry rallied 4.4%, the S&P 500 Index has gained 2% in the same period.

 

With the corporate tax cut likely to become a reality, transports are expected to gain further in the coming days. Naturally, investors will keenly wait for further updates on this burning issue.

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