3 Likely Transportation Winners This Earnings Season

The transportation sector comprises players from multiple fields including airline companies, truckers, shipping companies and railroads. The sector has benefited immensely from the weakness in oil prices since oil costs form one of the major input costs for any transportation company.

The transportation sector performed exceedingly well in the fourth quarter of 2014, with 63.6% of the companies beating earnings estimates and an equal number coming ahead of revenue expectations. The sector is expected to continue its healthy performance in the first quarter of 2015 riding on an improving U.S. economy and low fuel costs. Total earnings for the sector are expected to grow 37.5% on 3.1% growth in revenues. So far, about 25% of the companies in the transportation sector have reported their first-quarter results, with 66.7% of them registering positive earnings surprises.

(For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report and Closing the Books on Q4 Earnings Season.)

Low Fuel Costs Aid Airlines the Most

Airline stocks, within the broader transportation sector, have benefited the most from plunging oil prices given the inversely proportional relation between crude prices and the value of stocks. Crude prices have remained weak over the recent past due to an over-supplied oil market, especially in the face of lackluster global demand.

Crude prices have been hovering around the $50 a barrel mark. This represents a significant decline from the approximately $105 per barrel witnessed in July last year. In fact, oil prices have been fluctuating wildly after hitting a 6-year low of under $44 in Mar 2015.

Low fuel costs have aided fourth-quarter 2014 results of most carriers like Alaska Air Group Inc (NYSE:ALK), Southwest Airlines Company (NYSE:LUV) and American Airlines Group (NASDAQ:AAL). Weak oil prices are expected to benefit earnings in the first quarter as well. Although it is a fact that most carriers hedge at least some of their fuel costs, the majority of them should still continue to benefit considerably from the plunge in oil prices.

Disappointing Q1 in Store for Railroads?

Even though the broader transportation sector is expected to perform impressively in the first quarter, stocks in the rail road space are likely to suffer a setback. Major railroad operators like Norfolk Southern Corporation (NYSE:NSC) (NSC - Analyst Report) and Kansas City Southern have recently come out with below-par first quarter guidance. Norfolk Southern, which will report first quarter results on Apr 29, stated that it expects first-quarter 2015 earnings to come in at $1.00 per share, which is 15% below the first-quarter 2014 number. Further, the company expects to report first quarter revenues of $2.6 billion, which is 5% below the year-ago figure, on account of weak demand for coal. Likewise, Kansas City Southern (NYSE:KSU), which will report on Apr 21, predicted its first-quarter 2015 revenues to be flat on a year-over-year basis reflecting adverse foreign currency movements, low fuel surcharge revenues and slow carload growth from the energy sector.

An Overall Positive Sentiment

The struggle of the railroads notwithstanding, the broader picture for the transportation sector remains more or less a positive one. Consequently, it is a profitable strategy to zero in on a handful of transportation stocks that are poised to beat earnings estimates this quarter.

How to Pick the Right Stocks?

In view of the diversity prevalent in the transportation space, it isn’t an easy task to shortlist stocks that have the potential to report better-than-expected earnings. Here our proprietary methodology comes in handy. This is simply to look for stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Zacks Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. An earnings beat more often than not gives a boost to investor confidence in the stocks, which translates into quick price appreciation.

Below we present three transportation stocks that are expected to report better-than-earnings in their upcoming releases.

United Continental Holdings Inc (NYSE:UAL), the holding company of United Airlines, was formed through the merger of Continental Airlines and UAL Corp. on Oct 1, 2010. The Zacks Rank #3 stock currently has an earnings ESP of +3.55%. The Zacks Consensus Estimate for first-quarter 2015 earnings is pegged at $1.41. The company has a decent track record with respect to earnings – it has delivered positive earnings surprises in each of the last four quarters, with an average beat of 4.04%.

The company will report its first-quarter 2015 results on Apr 23, before the commencement of trading.

Ryder System (NYSE:R): Based in Miami, FL, this Zacks Rank #2 equipment and leasing stock currently has an earnings ESP of +3.96%. The Zacks Consensus Estimate for first-quarter 2015 earnings is pegged at $1.01 per share. This company too has a decent history with respect to earnings – its earnings have outperformed the Zacks Consensus Estimate in each of the last four quarters, with a four-quarter average beat of 2.50%.

The company will report its first-quarter 2015 results on Apr 22, before the commencement of trading.

Global Ship Lease Inc (NYSE:GSL): Based in London, this Zacks Rank #3 shipping stock has an earnings ESP of +100.00%. The Zacks Consensus Estimate for first-quarter 2015 earnings stands at a penny. The company has delivered positive earnings surprises in two of the last four quarters, with an average beat of 26.67%.

The company is scheduled to report first quarter 2015 results on Apr 30.

The Bottom Line

We believe transportation stocks will continue to perform well, going forward, on the back of favorable factors like cheap oil and an improving economy. Thus, for the time being, you can safely rely on the industry outperformers that possess significant earnings strength.

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