We are in the midst of another earnings season and last week
the transportation sector took center stage, with a number of
large stocks reporting their quarterly results.
On Tuesday, Delta Airlines (
) got the sector off to a positive start when it reported strong
fourth quarter results. The airliner posted earnings of 65 cents
per share, higher than the 63 cents analysts expected. A major
reason for the better than expected numbers was lower fuel costs
during the quarter. Revenues were up 6% during the quarter.
Alaska Air (
) also posted better than expected earnings, as did Southwest
). In both cases, lower fuel costs were a factor.
Looking forward, I am bullish on the sector. Consolidation within
the industry is allowing for steady fare increases, and lower
fuel costs should continue to help boost profits. The economic
crisis was particularly tough on the entire sector, but it
managed to turn things around in recent years, which by all
accounts was no easy task.
If airlines were able to turn things around in a global
recession, with high fuel costs and a weak job market, the future
could be equally as bright now that fuel costs are lowering and
the global economy continues to improve.
However, while I am bullish on the sector, there is always the
chance that things could move in the wrong direction. A quick
spike in oil prices could hurt the sector, as could a
deterioration of the global economy. Neither is expected to occur
in 2014, but it is impossible to rule out either possibility.
Switching over the railroad sector, Union Pacific (
) posted its fourth quarter results on Thursday, reporting better
than expected earnings and revenues. Earnings during the quarter
were $2.55 per share, topping the $2.49 analysts had forecast.
Revenues during the period were $5.63 billion, higher than the
$5.57 billion Wall Street expected.
Another railroad company to post strong quarterly results was
Norfolk Southern (
). Its fourth quarter income jumped 24%, and it reported earnings
of $1.64 per share, easily outpacing the $1.51 analysts had
forecast. Revenues were also better than expected, climbing 7.5%
year over year.
However, not all railroad companies were as strong during the
quarter. A big earnings miss by Kansas City Southern (KSU)
resulted in a steep selloff of its stock. KSU posted earnings of
$1.03 per share, missing estimates by 7 cents. On the bright
side, revenues were up 8.4% from the same period last year, and
were in-line with analyst estimates. Regardless of the revenue
increase, the stock quickly dropped 13% following the report.
Weakness in the coal industry continues to be a problem for
the rail sector, but increases in general merchandise shipping
are offsetting the problem. This was clearly seen in the Union
Pacific report, which showed strong gains in both automotive and
industrial shipments, which offset a 10% drop in coal
Improvements in the housing and auto market are expected to
continue in 2014, which should help boost shipment volumes for
railroad companies. As a result, I am bullish on the sector going
forward, but we must remain cautious due to the large exposure
most railroad companies have to the coal industry.
Looking at transportation stocks on the whole, I have a
bullish outlook. I expect that the global economy will continue
to improve in 2014, which should benefit transportation stocks
across the board. However, any trade I set up on the sector I
would prefer to be hedged, and highly diversified, just in case
the sector does run into trouble.
A perfect way to accomplish this would be a hedged trade on
iShares Transportation Average (IYT). IYT is set up to track the
Dow Jones Transportation Average, so it tracks the transportation
sector pretty closely. Among its top holdings are Union Pacific,
FedEx (FDX), Kansas City Southern, United Parcel Service (UPS)
and Alaska Air.
A nice hedged trade on IYT would be the June 111/116 bull put
credit spread. In this trade, you would sell the June 116 put
while buying the same number of June 111 puts for a credit of 45
cents. This trade has a target return of 9.9%, which is 24.4% on
an annualized basis (for comparison purposes only). IYT is
currently trading at $131.05, so the trade has 11.1% downside