Wheels Roll in Transportation, 3 Stocks Set to Beat Q4
In the wake of the World Bank's revised outlook on the global
economy, we are hopeful that the fourth quarter results of the U.S.
stocks will bring the mojo back for investors, who have otherwise
endured significant volatilities throughout 2013. Further,
encouraging U.S. retail data that uplifted the greenback leaves
little scope for any pessimism going forward.
The transportation sector too will benefit from the broader
optimism and we look forward to outperformance by some of its
stocks. Not only does the current momentum in the macro economy
work in favour of these stocks, the industry fundamentals also
continue to improve. From a modest beginning to a strong third
quarter, these stocks have proved their mettle, driving us to crown
them as our top picks.
Why Transportation is an Attractive Bet?
While fourth quarter results are underway, we are yet to see the
major actions in Transportation with only 9.1% of the sector
participants having reported. Overall, the sector is expected to
register a double-digit (17%) earnings improvement, stemming from
steady growth in airlines and railroad stocks.
According to the International Air Transport Association (IATA),
the 2014 outlook on the global airline industry looks promising
with profitability estimated at $16.4 billion on a passenger count
of 3.30 billion. Net profit margin is also expected to grow 2.2%.
Economic recovery and the resultant surge in air travel demand,
disciplined capacity and many new and enhanced ancillary revenue
opportunities would contribute to growth this year.
Railroads' operating performance too seems to have bounced back
amid coal woes thanks to operational efficiency, increased market
demand for intermodal services as well as shipment of key
commodities like petroleum products, automotives and grain crop.
In such a scenario, it might be a good idea to zero-in on a handful
of transportation stocks that are poised to beat earnings estimates
this quarter. An earnings surprise should help these stocks
outperform in the near term.
How to Find a Top Pick
Stock diversity in the transportation arena could muddle up your
picking power. An easy way to narrow down the list for your
portfolio is to take a look at stocks with solid Zacks Rank and
Earnings ESP is our proprietary methodology for determining stocks
having the best chance to surprise with their next earnings
announcement. The earnings ESP shows the percentage difference
between the Most Accurate estimate and the Zacks Consensus.
The combination of a positive to neutral Zacks Rank - Zacks Rank #1
(Strong Buy) or 2 (Buy) or 3 (Hold) - and a positive earnings ESP,
is usually a harbinger of earnings beat.
For investors seeking to benefit by applying this strategy, we have
chosen three transportation stocks that we believe will exhibit
significant upward potential following their upcoming earnings
Southwest Airlines Co.
): Dallas-based Southwest Airlines provides low cost passenger air
transportation services in the U.S. It primarily provides
short-haul, high frequency, point-to-point airline services
covering many secondary or downtown airports such as Dallas Love
Field, Houston Hobby, Chicago Midway, Baltimore/Washington
International, Burbank, Manchester, Oakland and San Jose. In
May 2011, Southwest completed the acquisition of AirTran Holdings,
which now operates as a wholly owned subsidiary under the name
AirTran Airways. As of Sep 30, 2013, Southwest operated 696 Boeing
aircraft and served 97 destinations along with AirTran.
The Zacks Consensus Estimates for fourth-quarter is 28 cents,
representing robust growth over the year-ago quarter. The company
registered an average earnings surprise of 41.40% over the trailing
The company presently carries a Zacks Rank #1 and has an earnings
ESP of +7.14%. Southwest Airlines is set to report its fourth
quarter results on Jan 23, before the opening bell.
Norfolk Southern Corporation
): Headquartered in Norfolk, Virginia, Norfolk Southern Corp. owns
a major freight railroad Norfolk Southern Railway, which also
represents a Class I railroad in the U.S. The company operates over
20,000 route miles across 22 Eastern states in the U.S. The company
offers rail transportation of commodities like coal and other raw
materials, intermediate products and finished goods. It also offers
comprehensive logistics and most extensive intermodal services on
the Eastern part of the U.S. and caters to overseas freight through
several Atlantic and Gulf Coast ports.
The Zacks Consensus Estimate for the fourth quarter is $1.50. This
represents a year-over-year improvement of 15.7%. The company
delivered average earnings surprise of 5.01% over the trailing 12
Norfolk Southern has an earnings ESP of +0.67% and retains a Zacks
Rank #3 (Hold). The company is slated to release its fourth quarter
results on Jan 22.
Canadian Pacific Railway Limited
): Based in Calagary, Alberta, Canadian Pacific is another
Class I railroad that provides rail freight transportation
services to the principal business centers of Canada from Montreal
to Vancouver, as well as the U.S. covering major cities like
Chicago, New York City, Detroit and Minneapolis. The company has
extended its network through collaborations with other Class I
railways in North America, which allows it to provide services and
access to markets across North America beyond its own rail network.
Currently, the Zacks Consensus Estimate for fourth-quarter is $1.87
with growth expectation of 46.3% from the prior-year quarter. The
company boasts an average earnings surprise of 1.49% over the
trailing 12 months.
Canadian Pacific currently holds a Zacks Rank #3 and has an
earnings ESP of +1.60%. The carrier is slated to report its fourth
quarter financial results on Jan 29, before market opens.
Conscious efforts to turn around are evident in the economy at
large. The transportation sector is also riding on the upturn with
palpable improvements in the fundamentals of airline and railroad
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