The third-quarter 2015 earnings season is in its final stages as far as transportation stocks are concerned, with only a few companies left to unveil their quarterly financial numbers. The story, though not drastically different from the second quarter, does represent an improvement over the second quarter scenario.
While most of the transportation stocks, who have already disclosed their numbers this earnings season, have delivered impressive bottom lines (courtesy low oil prices ), revenue weakness still persists. The dollar's strength has been one of the main culprits on the revenue front this earnings season, as was the case in the second quarter as well. Macro headwinds have also been a spoiler for revenues in the third quarter.
To justify the above commentary, we highlight certain statistics from the third quarter for transportation stocks. With all the S&P 500 members in the transportation space having already announced their third-quarter 2015 earnings, the aggregate earnings beat ratio is an impressive 85.7%. On the other hand, the revenue beat ratio is a measly 28.6%. Average earnings growth is 22.5% while year-over-year top-line growth has treaded into the negative territory and stands at a negative 1.3% (read more: Zacks Earning Trends report ). Though not very encouraging, the numbers are however better than their second-quarter 2015 counterparts.
Oil Mayhem Continues Aiding Transportation Stocks
The weakness in oil prices, which has lasted for well over a year, is nothing short of a godsend for stocks in the widely diversified transportation space. The sector, which includes airline companies, truckers, shipping stocks and railroads, has been basking in glory, as oil expenses form one of the major input costs for any transportation company. The gigantic fall can be gauged from the fact that currently oil is hovering around the $50 per barrel mark, having crossed the $100 a barrel mark just over a year ago.
String of Q3 Earnings Beats on Low Oil
The third quarter of 2015 has already seen major transportation companies like Delta Air Lines (DAL) and American Airlines Group (AAL) reporting higher-than-expected earnings. Airline companies have been the major beneficiaries as far as plunging oil prices are concerned, generating massive savings in the wake of the soft oil price scenario. For example, American Airlines Group, which does not hedge fuel costs, expects to generate savings of approximately $5 billion in 2015.
Apart from airline stocks, other transportation players like Ryder System (R), the leader in supply chain management and fleet management services, and J.B. Hunt (JBHT), a leading trucking carrier, have also registered earnings beats in the third quarter. However, railroad operators continue to struggle hurt by coal-related headwinds.
Plunging Oil Prices Favor Shipping Stocks Too
Stocks in the shipping space have also made the most out of soft oil prices. Apart from a positive impact on the demand of oil tankers, the operating costs of ships have also been significantly reduced, courtesy low oil prices. The steep decline in oil prices has also caused a significant year-over-year reduction in bunkering costs for the shipping industry.
Outperformers Still Left in the Bank
With a handful of transportation players yet to release their third-quarter outcomes, the favorable backdrop certainly calls for special attention on stocks in this sector. It won't be thus a bad idea to bet on some stocks in this space that are likely to report higher-than-expected earnings in the quarter.
However, given the high degree of diversity in the transportation space, it is by no means an easy task to shortlist stocks that have the potential to outperform on the earnings front. It is here that our proprietary methodology comes in handy. It advises investors to look for stocks that have the combination of a favorable Zacks Rank of #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 boosts investor confidence in the stocks, which translates into rapid price appreciation.
Two Likely Superstars
Using the above methodology, we hereby highlight two stocks that are likely to outshine the Zacks Consensus Estimate in the third quarter. With major airline companies having already reported, it is of little surprise that all both our choices belong to the "Trans-Ship" segment, which too is benefiting immensely from weak oil prices as discussed above.
Frontline Ltd. (FRO), based in Hamilton, Bermuda, is a provider of seaborne transportation of crude oil and oil products. This Zacks Rank #1 stock currently has an earnings ESP of +40.00%. The Zacks Consensus Estimate for third-quarter 2015 earnings is pegged at 5 cents. The company is expected to report its third-quarter results on Nov 24.
Star Bulk Carriers Corp. (SBLK) is a provider of seaborne transportation solutions in the dry bulk sector across the globe. Based in Athens, Greece, this Zacks Rank #3 stock currently has an earnings ESP of +12.50%. The company is expected to report its third-quarter results on Nov 17.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.