The fourth-quarter earnings season is drawing to a close for the widely diversified Zacks Transportation sector consisting of airlines, railroads, trucking and shipping companies among others. Notably, 92.9% of the S&P 500 companies in the sector have already reported earnings numbers with 76.9% beating on earnings, and 69.2% surpassing on revenues. Moreover, the bottom line of these companies improved 29.5% year over year on 7% revenue growth. These numbers are a clear depiction of the sector’s healthy earnings picture so far in the quarter. Adding to the positivity, stock prices have risen 3.1% (aggregate one-day stock market reaction to earnings releases) in response to earnings announcements.
Now let’s get some evidences of the afore-mentioned scenario by looking at the earnings reports of some key players in the sector.
In the airline space, United Continental Holdings (UAL - Free Report) reported better-than-expected earnings and revenues. Moreover, both the top and the bottom line have shown a substantial year-over-year improvement. Meanwhile, Delta Air Lines delivered better-than-expected earnings but lower-than-expected revenues in the quarter. However, both earnings and revenues improved on a year-over-year basis. Rising demand for air travel has been the key driver in the industry. Additionally, the oil price slump during the fourth quarter also boosted results.
In the railroad industry, high freight demand and volume growth has been the key catalysts. Evidently, railroad major Union Pacific Corporation (UNP - Free Report) surpassed both earnings and revenue estimates besides showing year-over-year improvements in each of the metrics. Norfolk Southern Corporation also came up with encouraging fourth-quarter results with better-than-expected earnings and revenues. Moreover, the numbers improved year over year on both counts.
Additionally, package deliveries companies like United Parcel Service pulled off strong fourth-quarter earnings statistics on solid e-commerce growth.
What’s in Store for the Remaining Companies?
It is a well-known fact that fuel prices represent a substantial input cost for any transportation player. Transports have been well served in this regard as oil prices plunged nearly 40% during the October-December period on fears of supply glut and economic headwinds. This sharp drop in oil prices is likely to fuel bottom-line growth in the final quarter of 2018.
As far as shipping stocks are concerned, improvement in shipping activity is anticipated to boost fourth-quarter results. Rise in production and ton miles coupled with a structural shortage of ships kept charter rates high for the most part of the fourth quarter.
Robust traffic during the Thanksgiving holiday period should drive fourth-quarter results of the airlines. Additionally, a strong holiday season performance on the back of sturdy e-commerce growth is likely to aid results of package delivery companies.
Despite the tailwinds, one needs to be mindful of the rising labor costs in the sector. Labor deals are very much in vogue in the transportation space with workers agitating to raise employees’ benefits and other facilities. Frequent labor contracts are bumping up operating expenses, which might in turn, affect bottom-line growth.
How to Pick Winners?
Given the above-mentioned positives in the sector, most of the remaining transport stocks are expected to perform well in the fourth quarter.
However, given the existence of a number of industry players, finding the right transportation bets with potential to beat on earnings can be a daunting 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 five transportation stocks that are likely to surpass the Zacks Consensus Estimate this earnings season.
Copa Holdings, S.A. (CPA - Free Report) offers airline passenger and cargo services through its main subsidiaries, namely Copa Airlines and Copa Colombia. It is based in Panama City, Panama. The Zacks Consensus Estimate for fourth-quarter earnings has been revised 5.1% upward in the last 60 days. Copa Holdings has an earnings ESP of +8.41% and a Zacks Rank #2. The company will unveil its final-quarter results on Feb 13. You can see the complete list of today’s Zacks #1 Rank stocks here.
LATAM Airlines Group S.A. (LTM - Free Report) also offers passenger and cargo services across the globe. The company is based in Santiago, Chile. The Zacks Consensus Estimate for fourth-quarter earnings has moved 15% north in the last 90 days. The company has an Earnings ESP of +2.90% and a Zacks Rank of 2. Its fourth-quarter earnings release is due on Mar 12.
Controladora Vuela Compania de Aviacion, S.A.B. de C.V. (VLRS - Free Report) is a low-cost airline headquartered in Santa Fe, Mexico City. The Zacks Consensus Estimate for the company’s fourth-quarter earnings has been raised a whopping 200% in the last 60 days. The company has an Earnings ESP of +111.11% and is a Zacks #2 Ranked player. It will announce fourth-quarter earnings numbers on Feb 21.
Aircastle Limited (AYR - Free Report) is a Stamford, CT-domiciled aircraft leasing company. The Zacks Consensus Estimate for the company’s fourth-quarter earnings has been revised more than 100% upward in the last 60 days. The company has an Earnings ESP of +2.76% and a Zacks Rank #3. It will release final-quarter results on Feb 12.
Scorpio Tankers (STNG - Free Report) is a provider of marine transportation of petroleum products worldwide. The company’s bottom line is expected to soar 63.6% year over year during the fourth quarter. The company has an Earnings ESP of +2.75% and a Zacks Rank of 3. It will report fourth-quarter financial figures on Feb 14.
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