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Transportation Sector Up 21.8% in Past 3 Months: 4 Picks

Maharathi Basu
·5 mins read

It is no longer news that the transportation sector has been one of the worst-affected areas in the investment world that bore a huge brunt of the ongoing pandemic.  However, investors interested in the above space are having something to cheer about lately owing to certain tailwinds. The renewed enthusiasm can be gauged from the fact that the Zacks Transportation sector has gained 21.8% in the past three months, handily outperforming the S&P 500 Index’s 6.6% appreciation.

Let’s delve deeper to unearth the factors responsible for this impressive price movement.

E-Commerce Surge: With the pandemic largely restricting people to their homes, consumers are placing orders more online. Per ACI Worldwide’s data, e-commerce transactions increased 24% year over year in August 2020 across the globe. This impressive growth in the method of buying and selling goods and services via a software platform is a huge positive, particularly for the package delivery companies in the sector.

Notably, United Parcel Service UPS delivered stellar results for the June quarter on the back of surging e-commerce demand. UPS is expected to perform well in the September quarter as well owing to this upside. Increase in residential and healthcare shipments should aid its results. In fact, UPS’ results should be boosted by growth in business-to-consumer shipment amid demand for residential delivery during the final quarter of the year as well.

Last week, FedEx Corporation FDX reported better-than-expected earnings per share and revenues for the first quarter of fiscal 2021 (ended Aug 31, 2020), also on solid e-commerce demand. The company's performance in the quarter was aided by the 36% jump in Ground revenues driven by higher residential delivery volume.

The upcoming holiday season should provide a further boost to UPS and FedEx’s prospects. Management at UPS recently announced that it expects to hire more than 100,000 seasonal employees to meet the anticipated expansion in package volumes during the period. FedEx reportedly aims to recruit 70,000 seasonal workers to meet the likely swell in delivery demand.

Uptick in Air-Travel Demand: With the gradual relaxation of restrictions, there has been a spurt in passengers opting for air travel. Notably, Southwest Airlines LUV management recently stated that air-travel demand picked up in August after deteriorating in July and the uptrend has continued thus far in September. Particularly, there has been an uptick in leisure-travel demand. As a result of this improvement, the carrier came out with an improved third-quarter view for cash burn.

The uptick in the number of passengers screened by the Transportation Security Administration (TSA) at airports bodes well for the airline stocks in the sector. Notably, TSA data showed that 701, 899 travelers went through the TSA checkpoints, on average, for the week ended Sep 20. This marks a huge improvement from the situation roughly six months ago when only 231,031 people were screened, on average, for the week ended Mar 29..

Other Tailwinds: The cost-cutting measures adopted by various transportation companies in the face of dwindling revenues are driving their bottom lines.

Also, the rebound in airfreight revenues owing to the increased usage of charters to meet customer needs following the cancellation of passenger flights (that usually carry freight as well as passenger luggage) is aiding companies like Expeditors International of Washington EXPD.

The gradual recovery in the freight scene is a boon to trucking companies like Landstar System LSTR. Recently, Landstar provided an upbeat guidance for the third quarter of 2020, courtesy of better trucking volumes achieved in July and August.

In view of the above-mentioned strengths, we believe, transportation stocks presently represent a pool of attractive investment opportunities. We thus selected four stocks that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have bullish current-year earnings estimate revisions despite the pandemic-related woes. You can see the complete list of today’s Zacks #1 Rank stocks here.

Our Choices

Our first pick is the Memphis, TN-based FedEx. The company currently sporting a Zacks Rank # 1 is benefitting immensely from the highly impressive shipping-volume growth graph. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 44.8% upward over the past 60 days.


Our next selection is Atlanta-domiciled UPS. Like FedEx, exponential e-commerce growth in the current scenario is a huge plus for this currently Zacks Rank #2 company. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 24.3% upward over the past 60 days.

The Seattle, WA-headquartered freight forwarding company Expeditors also features on our list. The stock currently carrying a Zacks Rank of 2 is benefiting from the stellar performance of its Airfreight Services unit. The stock has seen the Zacks Consensus Estimate for current-year earnings move 19.5% north over the past 60 days.

Improvement in the freight scenario made the Landstar stock, currently sporting a Zacks Rank of 1, a lucrative investment option. The stock has seen the Zacks Consensus Estimate for current-year earnings being raised 5.1% over the past 60 days.

Shares of FedEx, UPS, Expeditors and Landstar have rallied more than 76%, 49%, 22% and 16%, respectively, in the past three months. Take a look:



   

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
 
United Parcel Service, Inc. (UPS) : Free Stock Analysis Report
 
FedEx Corporation (FDX) : Free Stock Analysis Report
 
Expeditors International of Washington, Inc. (EXPD) : Free Stock Analysis Report
 
Landstar System, Inc. (LSTR) : Free Stock Analysis Report
 
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Zacks Investment Research