The Zacks Transportation Sector is widely diversified in nature. It houses airlines, railroads, shipping and trucking companies to name a few.
Despite headwinds like a sluggish freight environment, Boeing 737 Max groundings, driver shortage and macroeconomic issues like U.S. trade tensions with China, this key sector (one of the 16 Zacks sectors) is off to an impressive start in the ongoing Q2 2019 earnings season.
Sector heavyweights like Delta Air Lines and Union Pacific Corporation (UNP - Free Report) have not only outperformed with respect to the bottom line but have also witnessed year-over-year earnings growth. Investors interested in the sector would be hoping that this impressive performance is maintained throughout the current reporting cycle.
According to the latest Earnings Preview, total earnings of transports belonging to the S&P 500 universe are projected to increase 3.9% year over year in the current reporting cycle. The figure compares favorably to the 2.8% bottom-line growth witnessed by the S&P 500 transports in the preceding reporting cycle.
With most sector participants yet to report results, let’s look at the factors likely to influence the Q2 earnings performance.
Headwinds Likely to Affect Q2 of Transports
Weak freight revenues due to declining shipments are anticipated to dent the top line of railroads like Norfolk Southern Corporation (NSC - Free Report) . The downbeat freight scenario is quite evident from the fact that North American freight shipments have declined in each of the three months (April, May and June) of second-quarter 2019, according to the latest Cass Freight Shipments Index report.
Moreover, the bottom line of truckers are likely to be hurt by costs incurred in the quarter. In a bid to counter the acute driver shortage plaguing the trucking industry, companies have increased driver wages, which in turn could affect bottom-line growth.
Moreover, the ongoing trade squabble between the United States with China is likely to hurt results of companies like Expeditors International (EXPD - Free Report) , which has significant exposure to China.
Not All Brickbats Some Roses As Well
To counter the declining freight revenues, railroads are looking to check costs to drive the bottom line. Many railroads have adopted the Precision Scheduled Railroading model to improve efficiencies. As a result of the cost-reduction initiatives, the operating ratio (operating expenses as a percentage of revenues) of railroads that are yet to report Q2 results are likely to improve.
Another factor that should aid results is the growth in e-commerce. Moreover, Q2 results of airlines should reflect strong growth in passenger revenues. Strong traffic during the Memorial Day weekend in May and the ongoing summer season (which started from June) should result in a healthy uptick in passenger revenues. Affordable air fares, along with a much-improved job market and rising disposable income, have provided consumers an added incentive to opt for air travel.
Moreover, results of leasing companies should also benefit from a strong U.S. economy. Factors like healthy consumer spending and low unemployment rates bode well for such companies.Similarly, results of service providers to transporters are likely to be aided by a healthy U.S. economy.
How to Pick Winners?
The above writeup clearly suggests that despite some hiccups, there are quite a few positive for transports that might brighten their Q2 earnings picture.
However, given the existence of a number of industry players, finding the right transportation bets with the 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 four transportation stocks that are likely to surpass the Zacks Consensus Estimate for earnings this season.
JetBlue Airways (JBLU - Free Report) is a low-cost airline company based in Long Island City, New York.JetBluehas an Earnings ESP of +3.97% and a Zacks Rank #1. The carrier has an impressive earnings surprise history, having outshined the Zacks Consensus Estimate in each of the trailing four quarters.
JetBlue’s Q2 results, scheduled to be out on Jul 23, are expected to reflect healthy uptick in passenger revenues driven by strong demand for air travel. You can see the complete list of today’s Zacks #1 Rank stocks here.
Based in Atlanta, United Parcel Service (UPS - Free Report) is the world's largest express carrier and package delivery company. UPS has an Earnings ESP of +0.05% and a Zacks Rank #3. The company has outshined the Zacks Consensus Estimate in two of the trailing four quarters. UPS delivered in-line earnings in third-quarter 2018, while missed estimates in first-quarter 2019.
UPS’ Q2 results, scheduled to be released on Jul 24, are expected to aided by healthy growth in e-commerce.
Ryder System (R - Free Report) a Florida-based company, is recognized as one of the world's largest providers of integrated logistics and transportation solutions. Ryder has an Earnings ESP of +0.07% and a Zacks Rank #3. The company has outshined the Zacks Consensus Estimate in each of the trailing four quarters.
Ryder’s Q2 results, scheduled to be out on Jul 30, are expected to aided by an impressive performance of its Fleet Management Solutions division apart from operational efficiencies.
Hertz Global Holdings (HTZ - Free Report) based in Estero, FL, is a key player in the vehicle rental industry and is responsible for the operation of vehicle rental services under the Hertz, Dollar and Thrifty brands.
Hertz Global has an Earnings ESP of +120.23% and a Zacks Rank #3. The company has outshined the Zacks Consensus Estimate in each of the trailing four quarters. Hertz Global’s Q2 results, scheduled to be released on Aug 6, are expected to aided by an impressive performance of its U.S. Car Rental division on the back of efficient fleet management.
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