Rise in oil prices this year does not bode well for any transportation company and shipping stocks are no exception. This is because expenses associated with oil are considered one of the major input costs for any transportation player.
Per data provided by U.S. Energy Information Administration (EIA), the monthly average spot price of West Texas Intermediate (WTI) crude in July, August and September of 2018 was $70.98 per barrel, $68.06 and $70.23, respectively. The figures were much higher than the comparable year-ago readings of $46.63, $48.04 and $49.82, respectively.
In fact, the third-quarter earnings of key sector players like American Airlines Group Inc. (AAL - Free Report) and Alaska Air Group (ALK - Free Report) declined on a year-over-year basis mainly due to high fuel costs. Apart from high fuel costs, expenses on the labor front should also limit bottom-line growth of shipping stocks in the third quarter of 2018.
Despite the abovementioned headwinds, we note that shipping stocks do have their share of positives. Increased demand for commodities from key emerging markets and Europe is a positive for the industry.
Additionally, the relatively stable performance of the Baltic Dry Index (a gauge of the shipping costs of raw materials such as iron ore, coal and grain), in a year’s time, despite the headwinds, indicates that there is light at the end of the tunnel for shipping stocks.
Moreover, despite trade war related fears, the dry bulk shipping market continues to display signs of improvement. Improved fleet utilization and higher average spot rate are further positives for the industry.
Shipping Stocks’ Q3: What’s in Store?
Most transportation players having already unveiled their third-quarter numbers and only a handful reports from the space are still to come. The majority of these companies belong to the shipping space.
While high fuel costs and trade war fears are likely to weigh on the results, the abovementioned tailwinds should aid results.
Moreover, the Zacks Shipping industry currently carries a Zacks Industry Rank #85, which places it at the top 33% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
How to Pick the Winners?
Shipping stocks still have their share of positives and therefore it will not be a bad idea to add companies from the space, with the potential to report better-than-expected earnings in Q3, to one’s portfolio. An earnings beat more often than not boosts investor confidence in the stocks, which translates into rapid price appreciation.
However, picking the right stocks with the potential to trump Q3 earnings estimates is a difficult task. This is where the Zacks methodology shows its mettle.
Our research shows that stocks with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP have a higher chance — as high as 70% — of beating estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Based on the above methodology, we have zeroed in on four shipping stocks that are likely to surpass the Zacks Consensus Estimate this earnings season.
Frontline Ltd. (FRO - Free Report) , based in Hamilton, Bermuda, is a provider of seaborne transportation of crude oil and oil products. This Zacks Rank #3 company currently has an Earnings ESP of +30.77%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Safe Bulkers, Inc. (SB - Free Report) is a provider of marine dry bulk transportation services. The stock carries a Zacks Rank #3 and has an Earnings ESP of +30.77%. The company is scheduled to report results on Nov 7.
Teekay Tankers Ltd. (TNK - Free Report) , based in Hamilton, Bermuda, provides international marine transportation of crude oil. The stock carries a Zacks Rank #3 and has an Earnings ESP of +5.40%. The company is scheduled to report its third-quarter results on Nov 15.
Navios Maritime Partners L.P. (NMM - Free Report) is an international owner and operator of dry cargo vessels, providing seaborne transportation services of dry bulk commodities. It carries a Zacks Rank #3 and has an Earnings ESP of +9.09%. The company is expected to report results on Nov 13.
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