Transportation Sector Starts Q1 on Strong Note: Key Takeaways

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The diversified transportation sector, which includes airline companies, railroads, truckers and shippers, among others, got off to an impressive start in first-quarter 2018 earnings season. As the U.S. economy continues to grow, demand for carriage is also increasing and this momentum is anticipated to sustain in 2018.

Transportation sector is the lifeblood of the economy as it moves freights across the country and offshore. Favorable economic condition along with promising fiscal and regulatory policies from the Trump administration bode well for the sector.

Performance to Date

So far, two major airline operators Delta Air Lines Inc. DAL and United Continental Holdings Inc. UAL as well as freight railroad behemoth CSX Corp. CSX delivered highly impressive results. Each of these three companies handily surpassed both the top and bottom line with respect to the Zacks Consensus Estimate.

Additionally, transport logistic company J.B. Hunt Transport Services Inc. JBHT reported mixed results. The top line outpaced the Zacks Consensus Estimate while the bottom line missed the same marginally.  

All four stocks mentioned above carry a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Tax Overhaul: A Major Boost

The two pro-growth agendas of President Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the Transportation sector. The corporate tax rate was recently lowered from 35% to 21%., its historic low in 78 years. A large part of transporters book much of their revenues in the homeland. Consequently, a significant reduction in corporate tax rate borne by transporters would be immediately accretive to cash flow.

Capital-Intensive Nature of Transportation Sector

Transportation companies, mainly railroads and airlines, invest significantly in capital expenditure as the industry is capital-intensive in nature. Under the old law, capital expenditures cannot be tax-deducted in the year they were incurred. Consequently, U.S. corporates needed to plan judiciously regarding their capital expenditure.

However, following the U.S. tax overhaul, the companies will be able to deduct their capital expenditures from the taxable income immediately. In fact, going forward if the companies increase their capital expenditures, their tax bills for the year would be lowered significantly due to higher deductions.

This in fact will leave more cash in the hands of transporters to fund project expansions, acquisitions and share repurchases among others. Apart from railroads and package delivery companies, stocks belonging to the airline space are also likely to be huge beneficiaries of the new tax law.

Robust Demand for Freight

A thriving and improving economy supports the overall bullishness of the transport sector, as it implies that more goods are being transported across the United States. Improved global growth prospects, sustained business and consumer confidence have in turn helped the transport sector recover from the sluggishness in 2017 to quite an extent.

Economic growth and demand for freight are positively correlated. Healthy growth in manufacturing, construction, mining and automobile production will increase demand for more freight.

Moreover, the government has taken a decision to spend a whopping $1.5 trillion on several infrastructure projects like constructing new roads, bridges, highways, railways and waterways across the country over a period of 10 years. This project will generate significant demand for manufacturing sector, which in turn will raise demand for freight, benefiting the transportation sector.  

Price Performance

The chart below shows year to date price performance of four stocks mentioned above.

Bottom Line

The U.S. economy is gathering steam. With the overall economy back on track, things are looking up for the transportation sector as well. A robust U.S. economy, healthy consumer and business confidence, massive tax haul and business friendly policies of the government are anticipated to fuel transportation sector's growth.

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Delta Air Lines, Inc. (DAL): Free Stock Analysis Report

United Continental Holdings, Inc. (UAL): Free Stock Analysis Report

CSX Corporation (CSX): Free Stock Analysis Report

J.B. Hunt Transport Services, Inc. (JBHT): 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: DAL , UAL , CSX , JBHT

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