The year 2018 has been an unhappy one for transportation stocks. Transports, barring a few bright spots, have been plagued by various headwinds including high costs, weather-related disruptions and political upheavals at various points of the year.
Due to multiple headwinds, the Zacks Transportation sector, which includes airlines, railroads, shippers and truckers among others, has shed 23.4% value on a year-to-date basis. The sector’s performance is worse than that of the Zacks S&P 500 composite, which has declined 12%.
YTD Price Performance
Let’s delve into the details as to why the sector took a beating this year.
Oil Prices High for Majority of 2018
It is a well-documented fact that costs associated with oil are considered major inputs for any transportation company. A rise in oil price leads to a sharp increase in operating expenses of the sector participants, which in turn implies that the health of these stocks is inversely related to fuel cost.
Oil prices had displayed an uptrend till early October, increasing more than 20%. The surge in oil prices was the primary reason behind the bottom-lines of most transports contracting in each of the three quarters of 2018.
Oil Rout Fails to Boost Transports
In a stunning reversal, oil prices have been declining steadily since then and the commodity has plunged more than 40% on fears of supply glut and economic headwinds. Currently, it is hovering around $45 a barrel.
Even though oil price decline is favorable for transports, stock prices of sector participants have remained subdued even in the low-oil price scenario. Transports have been victims of factors like U.S.-China trade war, Fed rate hike, Brexit-related uncertainty and fears of global economic slowdown which have prevented them from taking advantage of a decline in one of their major input costs.
Fears of a global trade slowdown were reflected in the bearish fiscal 2019 guidance provided by one of the major players in the sector — FedEx Corporation (FDX - Free Report) — while releasing its second-quarter fiscal 2019 (ended Nov 30, 2018) results.
Oil price volatility apart, high labor costs limited bottom-line growth of transports in 2018. Technical glitches, labor strife, driver shortages and foul weather have also hurt profitability of sector participants in 2018.
Not All Brickbats, Some Roses Too
Despite the presence of the above-mentioned headwinds, the sector did have some positives this year. For instance, freight activity has been robust in the United States this year as highlighted by the fact that the Cass Freight Shipments Index has expanded on a year-over-year basis in each of the first 11 months of 2018.
Additionally, the current tax law, which came into effect late last year, is a huge positive for transports. Lower tax-related outflow enabled them to undertake shareholder-friendly activities this year. As an evidence, the likes of Norfolk Southern Corporation (NSC - Free Report) hiked dividend payouts this year. Moreover, strong demand for air travel had been a boon for airlines.
What’s in Store for 2019?
We expect oil prices to remain volatile in 2019. However, factors like strong travel demand and an impressive freight scenario should work in favor of transports in the coming year. Reduced tax ratesshould continue to boostcash flow. Huge savings imply that more cash will be available to fund their capital expenditures, acquisitions and share repurchases among others.
Against this backdrop, we have picked five transportation players with a Zacks Rank of #1 (Strong Buy) or 2 (Buy), which should be prudent choices for investors in 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.
Finally, the stocks, which we shall cherry-pick, have outperformed the S&P 500 index in 2018, a turbulent year for transports as highlighted above. A chart showing the share price movement of the five stocks this year so far is given below.
Azul S.A. (AZUL - Free Report) , based in Barueri, is one of the largest airlines in Brazil in terms of departures and destinations covered. The stock, which currently carries a Zacks Rank #1, has an expected earnings growth of 39.3% for the next year. Over 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 13.3%.
Frontline Ltd. (FRO - Free Report) , based in Hamilton, Bermuda, is a provider of seaborne transportation of crude oil and oil products. The stock, which currently carries a Zacks Rank #1, has an expected earnings growth in excess of 200% for the next year. Over 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 73.3%.
Spirit Airlines (SAVE - Free Report) , based in Miramar, FL, is an ultra-low-cost carrier which provides travel opportunities principally to and from South Florida, the Caribbean and Latin America. The stock, which currently carries a Zacks Rank #1, has an expected earnings growth of 31% for next year. Over 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 28%.
Seaspan Corporation (SSW - Free Report) is a leading independent owner, operator and manager of containerships. The stock carries a Zacks Rank #2. Over 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 4.1%.
United Continental Holdings (UAL - Free Report) , based in Chicago, is the holding company for both United Airlines and Continental Airlines. The company operates an average of nearly 5,000 flights a day to multiple destinations. The stock, which currently carries a Zacks Rank #2, has an expected earnings growth of 19.6% for the next year. Over 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 4.3%.
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