The Zacks Transportation Sector is widely diversified in nature. It houses airlines, railroads, shipping and trucking companies to name a few.
The Q4 earnings season will be kick-started by two airline heavyweights — Delta Air Lines and United Continental Holdings (UAL - Free Report) — tomorrow. Other notable S&P 500 transports scheduled to report this week include railroad major CSX Corporation (CSX - Free Report) and J.B. Hunt Transport Services (JBHT - Free Report) , a key truck operator.
In fact, according to our latest Earnings Preview, total earnings of transports belonging to the S&P 500 universe are projected to increase 22.5% year over year in the quarter to be reported. Let’s delve deep to unearth the factors likely to influence the Q4 earnings performance of sector participants.
It is known to all 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.
Transports have been well served in this regard as oil prices declined nearly 40% in the Q4 period (October-December). In fact, oil prices had displayed an uptrend till early October. However, the commodity displayed a downward trend for the remainder of Q4 on fears of supply glut and economic headwinds. The sharp drop in oil prices is likely to fuel bottom-line growth in the final quarter of 2018.
Despite low oil prices, one has to be mindful of issues like factors like high labor costs and driver shortage, which might limit bottom-line growth for transports in Q4.
However, reduced tax rates, courtesy of the current tax law, is a tailwind and should bolster the earnings picture of transports in Q4. Strong holiday season performance on the back of robust e-commerce growth should aid results of package delivery companies like United Parcel Service in the October-December period. Similarly, robust traffic during the Thanksgiving holiday period should boost Q4 results of airlines.
Results of railroads on the other hand are likely to be boosted by volume growth and cost cutting efforts. They are likely to see an improvement in their operating ratios (operating expenses as a percentage of revenues) in the current earnings season.
How to Pick Winners?
Given the above-mentioned tailwinds, it would not be a bad idea to add companies from the space with the potential of reporting better-than-expected earnings in Q4, to one’s portfolio. An earnings beat more often than not boosts investor confidence in the stocks, which translates into rapid price appreciation.
However, given the high degree of diversity in the transportation space, the task is by no means easy. In fact, it is akin to searching for a needle in a haystack. While it is impossible to be sure about such outperformers, our proprietary methodology -- Earnings ESP -- makes it relatively simple. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
With the aid of the above methodology, we hereby present five transportation stocks that are expected to outshine earnings estimates in their upcoming releases.
Expeditors International of Washington (EXPD - Free Report) , based in Seattle, WA, is a leading 3PL provider. The Zacks Consensus Estimate for fourth-quarter earnings has been revised upward to the tune of 1.2% over the last 60 days. Expeditors has an Earnings ESP of +0.39% and carries a Zacks Rank #1. Expeditors will unveil its results on Feb 19.
United Continental Holdings, based in Chicago, provides air transportation services. The Zacks Consensus Estimate for fourth-quarter earnings has been revised upward to the tune of 5.8% over the last 60 days. The company has an Earnings ESP of +13.26%, as the Most Accurate Estimate exceeds the Zacks Consensus Estimate of $1.84 by 24 cents. The stock carries a Zacks Rank #2.
Old Dominion Freight Line (ODFL - Free Report) is a leading, LTL (less-than-truckload) company based in Thomasville, NC. It offers LTL service on a regional, inter-regional and national basis. The company has an Earnings ESP of +1.21%%, as the Most Accurate Estimate exceeds the Zacks Consensus Estimate of $1.75 by 2 cents. It carries a Zacks Rank #3 (Hold). Old Dominion Freight Line will unveil its results on Feb 7.
Southwest Airlines (LUV - Free Report) is a low-cost carrier that provides scheduled air transportation in the United States. The Zacks Consensus Estimate for fourth-quarter earnings has been revised upward to the tune of 1% over the last 60 days. This Dallas-based company has an Earnings ESP of +2.69%, as the Most Accurate Estimate exceeds the Zacks Consensus Estimate of $1.05 by 3 cents. The stock carries a Zacks Rank #3. Southwest Airlines will unveil its results on Jan 24.
Our final choice is ArcBest Corporation ((ARCB - Free Report) ). This Zacks Rank #1 company, based in Fort Smith, AR, provides freight transportation services and solutions. The Zacks Consensus Estimate for fourth-quarter earnings has been revised 1.1% upward over the last 60 days. The company has an Earnings ESP of +3.92%, as the Most Accurate Estimate exceeds the Zacks Consensus Estimate of 92 cents by 4 cents. ArcBest is scheduled to reveal its results on Jan 30.
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