The diversified transportation sector, which includes airline companies, railroads, truckers and shippers, to name a few, recovered in the last quarter of 2017 after struggling for most of the year.
An improving U.S. economy, substantial surge in manufactured and retail goods, and a sharp rebound in a number of end markets are expected to fuel the transportation sector’s growth. Consequently, companies offering equipment financing and leasing, logistics and supply chain management services to transporters have also bounced back in 2018.
Robust U.S. Macro Economy
Strong GDP growth supported by encouraging labor market, retail sales and industrial production data has accelerated economic activities. Consumer spending has increased, driven by encouraging economic conditions and strong government outlays. In the third quarter of 2017, the U.S. economy improved at an impressive annual rate of 3.3%. It came in above the consensus estimate of 2.6% and the second quarter figure of 3.1%. It was also the first time since 2014 that the GDP grew 3% year over year for two consecutive quarters.
Recovery of the U.S. economy is also likely to pave the way for transportation sector. U.S. GDP is expected to increase 2.4% in 2018, higher than what was achieved in the last two years. Generally, a buoyant domestic economy results in an uptick in shipments of goods across the United States.
Strong Commodity Market
The rise in natural gas prices will also boost demand for coal. Moreover, per the U.S. Energy Information Administration (EIA), coal production in the United States will increase in 2018. Apart from coal, the scenario pertaining to another key source of revenues for transporters is intermodal, which has improved by leaps and bounds this year. In fact, intermodal shipments are expected to grow 4.2% in 2018. Stabilization of commodity prices has helped reignite investors faith in the transportation sector with the improvement in the economic conditions.
President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the U.S. economy.
The proposal to reduce corporate taxes from the current 35% to 20% is likely to bring corporate tax rate at its historic low in 78 years. A large part of transporters book much of their revenues in the homeland. Therefore, a significant reduction in corporate tax rate faced by transporters would be immediately accretive to cash flow. Moreover, the tax proposal offers to provide incentives to companies to repatriate accumulated profits from overseas with an even lower tax rate.
Capital-Intensive Nature of Transportation Sector
Transportation stocks, mainly railroads and airlines, invest significantly for capital expenditure as the industry is capital-intensive in nature. 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 the taxable income immediately, per the U.S. tax overhaul. Naturally, this aspect hugely favors transports.
As and when the companies are able to reduce capital expenses in the year of their occurrence, their tax bills for the year would be lowered significantly due to higher deductions. This in fact will leave more cash in the hands of these companies to fund their capital expenditures, acquisitions and share repurchases among others.
Apart from railroads and package delivery companies, stocks from the airline space are also 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 assist the 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.
Effect on Transportation Sector
A thriving and improving economy also supports the overall bullishness of the transport sector, as it implies that more goods are being transported across the United States. Improved global growth prospects and sustained business and consumer confidence have in turn helped the transport sector recover from the sluggishness in 2017 to quite an extent. Easily available credit also strengthens the situation. As a result, companies which offer equipment financing, leasing, logistics and supply chain management to transporters are also enjoying a bull run.
Transportation-Services Industry Sports Favorable Zacks Rank
The Transportation Services industry is currently in a strong position from the Zacks Industry Rank perspective. The industry is currently in the top 38% (96 out of 256) of the Zacks Categorized industries, suggesting it is well-positioned. Historically, the top 50% of the Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.
Given this scenario, we suggest three stocks to investors with a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. These stocks also promise solid dividend yield.
Schneider National Inc. (SNDR - Free Report) : Headquartered in Green Bay, WI, this company is a transportation and logistics services company. It is a premier provider of truckload, intermodal and logistics solutions. Schneider National sports a Zacks Rank #1 and has a dividend yield of 0.70%.
Student Transportation Inc. : Headquartered in Barrie, ON, this company provides school bus transportation services in the United States and Canada. Its services are delivered by drivers, dispatchers, maintenance technicians and terminal managers. Student Transportation sports a Zacks Rank #1 and has a dividend yield of 7.18%.
Matson Inc. (MATX - Free Report) : Headquartered in Honolulu, HI, this company operates as an ocean transportation and logistics company. It offers shipping services in Hawaii, Guam, and Micronesia islands and expedited service from China to southern California. Matson sports a Zacks Rank #2 and has a dividend yield of 2.60%.
Chart Looks Attractive
The chart below depicts the strong performance of the above-mentioned companies in the last two months.
The U.S. economy is gathering steam. With the overall economy back on track, things are looking up for the transportation sector as well. We believe that this key sector (one of the 16 Zacks sectors) is likely to end 2018 on a triumphant note. At this stage, we believe that these three stocks with a favourable Zacks Rank are poised to capitalize on the growing opportunities.
Zacks Editor-in-Chief Goes "All In" on This Stock
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