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Time to Invest in the Transportation Sector


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Earnings season is a good time to rethink your investments because that's when companies tell you how the current environment affects them, how they are adapting, whether they see growth slowing or picking up, and so forth. Such guidance is particularly important this earnings season as the U.S. and China are yet to come to an understanding on trade, global trade shrinks (partly impacted by the slowdown in China, which is the lowest in 28 years) even as other international issues like the Brexit adds to uncertainties.

This doesn't make for the most encouraging backdrop for the transportation sector, which essentially depends on the volume of trade and travel within the country and outside.

The sector, which can broadly be discussed under the airline, rail, shipping, truck and services industries is therefore tied to macro factors like GDP growth, industrial production, construction volumes and trade, as well as consumer demand.

Airlines

The Transportation - Airlines group (Zacks Rank 7 out of 250+, or top 3%) has underperformed the S&P 500 over the past year, losing 23.6% compared to the S&P's 7.0% decline.

But results and analyst estimates haven't deteriorated as much.

Of the four companies that have reported quarterly results this quarter, all have topped analyst expectations.

The earnings estimates for the Dec 2018 and Mar 2019 quarters are up 10.9% and 4.6% in the last 12 months.

Since the volume of business and leisure travel, as well as available capacity determine the load factor, consumer confidence and disposable income play a big role in revenue generation.

The U.S. consumer sentiment for Jan 2019 of 90.7 fell from 98.3 in December to 90.7 -- because of fears regarding the domestic economy -- compared to market expectation of 97%. While down from recent highs, it remains positive.  BofA CEO Moynihan says that based on the company's credit card and bank account information, consumer spending is increasing at 5-6% now and although it was stronger earlier, it is far from negative.

A big positive is the slump in oil prices , which is bringing down operational cost.

There are a large number of buy-ranked stocks here: AZUL SA AZUL , Air France - KLM AFLYY and Spirit Airlines SAVE have a Zacks Rank #1 (Strong Buy), while Alaska Airlines (ALK), Allegiant Travel Company (ALGT), American Airlines (AAL), Delta Airlines (DAL) and Jet Blue (JBLU) are some of the Zacks Rank #2 (Buy) stocks.

Rail

The Transportation - Rail group (Zacks Rank 88 out of 250+, or top 35%) has outperformed the S&P 500 over the past year, gaining 9.4%.

Results have been less than spectacular so far this quarter with one out of three companies that have reported results beating estimates. The good thing is that there also haven't been any misses yet.

There is almost no change in December and March quarter estimates in the last 12 months.

Since agricultural produce, metals, construction material and fuel (such as coal) are all moved within the country and across borders by train, the sector is impacted by things like GDP growth, manufacturing growth, construction spending and agricultural production.

Smooth cross border trade also helps, especially since trade volume with the country's closest neighbors is very high. So the resolution of conflict between the U.S., Mexico and Canada and the renegotiation of NAFTA under the new United States-Mexico-Canada Agreement (USMCA) is a big positive.

GDP growth, which is hovering around 3%, could fall to zero in the seasonally softer first quarter because of the government shutdown, but according to White House economic advisor Kevin Hassett, this would lead to a 4-5% growth number in the following quarter once operations resume. So the softness in the growth number isn't related to underlying weakness in the economy.

In December the Federal Reserve slightly lowered its GDP growth estimate for 2019 from 2.5% to 2.3% while raising long term expectations from 1.8% to 1.9%. What's more, unemployment rates are expected to remain low at under 4% through 2021.

The ISM report for Dec 2018 shows slowing growth in PMI, new orders, production, employment and prices. At the same time, because of caution at customers (which are maintaining very low inventory levels), supplier deliveries are slowing down and inventories are growing at a slower rate to maintain a steady backlog.

All this goes to show that there is a lot of caution at both customers and manufacturers despite the still-expanding economy. A scenario where we ship to consumption is healthy in any situation and enables a quick pullback.

There are uncertainties in the construction market, which has seen decelerating growth for around 2 years following several years of double-digit growth. This year, growth should have been about even, but tariffs and trade wars are adding pressure. Likewise for agricultural production.

Trade war concerns mean that the segment will be worth another look after the March 2 deadline.

Shipping

The Transportation - Shipping group (Zacks Rank 106 out of 250+, or top 42%) has mostly underperformed the S&P 500 over the past year, losing 20.8%.

But results are likely to meet or exceed lowered analyst expectations as a fallout of the trade war and fears of shrinking global growth and trade.

The only company that has reported results this quarter has topped analyst expectations.

The earnings estimates for the Dec 2018 and Mar 2019 quarters have both dropped substantially in the last 12 months.

So let's see what experts have to say about international trade this year-

The International Monetary Fund (IMF) lowered its growth outlook slightly for 2019 and 2020. It now expects global growth of 3.5% in 2019 and 3.6% in 2020 (previous 3.7% for both years).

China's slowing growth rate is also a concern; its GDP grew 6.6% in 2018 and December quarter growth of 6.4% means that further deceleration is in the cards.

The World Bank also points to slightly slower growth this year that may however be adjusted if trade war concerns alleviate. It's current forecast for global growth in 2019 is 2.9%, down from 3% in 2018, with advanced economies growing 2% and emerging economies 4.2%. It expects U.S. to grow 2.5% this year, down from 2.9% in 2018. China is expected to grow 6.2% this year, down from 6.5% in 2018.

Another factor impacting trade this year is Brexit, which goes into effect at the end of March. As a result, the cost of trade between the UK and EU countries could increase and trade volumes could be impacted.    

Despite the gloom and doom predicted for the year, it's worth nothing that even a slightly slower growth rate is still a growth rate, and far from zero.

Besides, there's one section of the shipping industry that is focused on crude oil and LNG, both of which will remain steady, especially given currently low oil prices.

Shipbroker Banchero Costa sees continually increasing rates for LNG shipping in particular. The prices will be driven by strong demand and relatively limited supply as the complexities of liquefying natural gas before shipping make capacity addition difficult.

Recent capacity additions helped growth rates swell from the 10-year average of around 5% to 7.5% in 2016, 9.9% in 2017 and an estimated 10% in 2018. Moreover, although not among the top suppliers like Australia and Qatar, the U.S. has entered the market in a big way, with shipments up 58% in 2017. So opportunities abound.

There are a large number of buy-ranked stocks here: KNOT Offshore Partners LP KNOP and Ship Finance International Ltd. SFL have a Zacks Rank #1 (Strong Buy), while Dorian LPG Ltd. LPG , Frontline Ltd. (FRO), GasLog LP. GLOG , Navios Maritime Acquisition Corp. NNA and Nordic American Tankers Limited NAT are some of the Zacks Rank #2 stocks.

Truck

The Transportation - Truck group (Zacks Rank 107 out of 250+, or top 42%) has underperformed the S&P 500 over the past year, losing 18.2%.

But results are proving better than expected.

Of the three companies that have reported quarterly results this quarter, all have topped analyst expectations.

This month, the earnings estimates for the Dec 2018 and Mar 2019 quarters were slightly adjusted to account for the ongoing uncertainty.

The factors impacting these surface transport companies have been covered above.

Three names are worth calling out in the space today: ArcBest Corporation ARCB , Heartland Express, Inc. HTLD and J.B. Hunt Transport Services, Inc. (JBHT), all of which carry a Zacks Rank #2.


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Air France-KLM SA (AFLYY): Free Stock Analysis Report

Spirit Airlines, Inc. (SAVE): Free Stock Analysis Report

KNOT Offshore Partners LP (KNOP): Free Stock Analysis Report

GasLog LP. (GLOG): Get Free Report

ArcBest Corporation (ARCB): Get Free Report

Heartland Express, Inc. (HTLD): Free Stock Analysis Report

AZUL SA (AZUL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Investing , Business , Stocks
Referenced Symbols: AFLYY , SAVE , KNOP , GLOG , ARCB




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