Within the widely diversified transportation sector, consisting of airlines, railroads, truckers, shippers to name a few, railroad companies have been benefiting from strong demand for freight on the back of a buoyant economy and solid volume growth. These tailwinds drove third-quarter results of railroad majors like Union Pacific Corporation (UNP - Free Report) and Norfolk Southern Corporation (NSC - Free Report) , which reported better-than-expected earnings and revenues. Moreover, both the top and the bottom line improved significantly year over year.
Package delivery companies like United Parcel Service, Inc. (UPS - Free Report) are gaining from robust e-commerce growth. This company’s top line improved significantly year over year and also surpassed the Zacks Consensus Estimate. The bottom line also increased substantially on a year-over-year basis.
However, escalating fuel prices are pushing up the operating expenses and in turn, hampering the transportation companies’ bottom-line growth. 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, Inc. declined on a year-over-year basis, mainly due to high fuel costs.
What’s in Store This Earnings Season?
Majority of the transportation players yet to report earnings numbers are from the shipping industry. Increased demand for commodities from the 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, in spite of trade war related fears, the dry bulk shipping market consistently displays signs of improvement. Better fleet utilization and higher average spot rate are further upsides for the industry.
While high fuel costs and trade war fears are likely to weigh on the results, the above-mentioned tailwinds should aid results.
How to Pick Winners
Barring a few roadblocks, transportation stocks boast numerous tailwinds, which are fueling growth for the sector. Thus, it won’t be a bad idea to add a few good gems from this sector with potential to post better-than-expected earnings in Q3 to one’s portfolio. An earnings beat more often than not boosts investor confidence in the stocks, translating into a rapid share price appreciation.
However, selecting the right stocks with big promises to trump Q3 earnings estimates is a difficult task. This is where the Zacks methodology proves 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 maximum chances — 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 three transportation 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.
The company is scheduled to report third-quarter earnings on Nov 16.
Teekay Tankers Ltd. (TNK - Free Report) , based in Hamilton, Bermuda, provides international marine transportation of crude oil. The stock has a Zacks Rank of 3 and an Earnings ESP of +5.40%. The company is slated to release third-quarter results on Nov 15.
Hoegh LNG Partners LP (HMLP - Free Report) , based in Hamilton, Bermuda, is a provider of floating LNG services under long-term contracts. The company is a Zacks #3 Ranked player and has an Earnings ESP of +17.19%. It will announce third-quarter financial numbers on Nov 29.
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