The widely diversified transportation sector, which includes airlines, railroads, truckers and shippers to name a few, witnessed muted growth in 2019, primarily due to the Boeing 737 MAX groundings and a soft freight scenario in the United States thanks to its trade tensions with China.
The Zacks Transportation sector’s subdued performance can be made out from its underperformance with respect to the S&P 500 Index in a year’s time. While the sector has gained 19% in a year, the S&P 500 Index has rallied approximately 28%.
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Nevertheless, with fuel expense comprising a substantial input cost for any transportation player, modest oil prices have contributed to the sector’s growth. Separately, robust air travel demand benefited the airlines, whereas, improvement in the shipping market drove the growth of the shipping companies. Meanwhile, railroads saw impressive bottom-line growth owing to cost-cutting measures courtesy of the precision scheduled railroading model.
Transportation Sector Tailwinds in 2020
Heading into 2020, the Boeing 737 MAX related uncertainty lingers. However, easing trade tensions, low fuel prices, rising air travel demand and steady interest rates act as key catalysts to the transportation sector’s growth.
The phase one trade deal reached between United States and China would mean reduction in U.S. tariffs on Chinese goods as well as increased purchase of U.S. farm, energy and manufactured goods by China, upon signing (expected in January). This is a welcome relief to most of the transportation divisions, such as equipment and leasing, shipping as well as railroads, which have witnessed tepid growth due to the trade tussle.
Federal Reserve’s rate cuts in 2019 have held up spending levels. This in turn has kept demand from falling significantly in the equipment and leasing industry, despite weak market conditions due the trade dispute. With interest rates anticipated to remain stable in 2020 and favorable developments on the trade front, the industry is likely to see a demand boost.
As for railroads, stringent cost-control measures have supported bottom-line growth, partly offsetting the adversity from freight woes. Continued cost-containment measures coupled with the anticipated trade truce is likely to lift railroad companies.
Apart from the forward-looking trade environment, the shipping companies are expected to benefit from the International Maritime Organisation (IMO) 2020 regulations. The regulations aimed at curbing pollution, are predicted to drive tanker rates due to tight tonnage supply and robust demand for oil shipments.
In spite of the deal inked by the OPEC group and its allies in mid-December to cut production, most industry experts expect crude oil prices to remain stable in 2020. If at all it increases, it will only be modestly. This outlook on crude oil should support the bottom line of transportation players.
Additionally, increasing demand for air travel, thanks to the steady growth in the domestic economy, should bolster passenger revenues (contributes more than 90% to the top line of most carriers) of airlines. The International Air Transport Association (IATA) expects passenger revenues (excluding ancillaries) to touch $581 billion in 2020, higher than the 2019 levels. Moreover, the research firm expects airline profits to be $29.3 billion next year compared with $25.9 billion anticipated in 2019. Approximately 4.72 billion passengers are expected to take to the skies in 2020, up year over year. Passenger traffic is anticipated to grow 4.1% next year.
Transportation Picks to Enrich Your Portfolio
Given the numerous growth drivers for the transportation sector in 2020, it would be wise to capitalize on the situation and invest in some top-ranked transportation stocks that will generate handsome returns.
Considering the vastness of the sector, it is by no means an easy task to pick outperformers for the coming year. This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in handy.
Each of the stocks mentioned below sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Deutsche Lufthansa AG DLAKY functions as an aviation company in Germany as well as internationally. The Zacks Consensus Estimate for its 2020 earnings has been revised 8.8% upward in the last 60 days. Additionally, the stock carries a VGM Score of A. The company has an expected earnings per share growth of 17.3% for 2020, against the industry’s 11.8%.
Hawaiian Holdings, Inc. HA is an airline company based in Honolulu County, HI. The carrier provides scheduled air transportation of passengers and cargo. The Zacks Consensus Estimate for its 2020 earnings has moved 7.9% north in the last 60 days. The stock carries a VGM Score of A. The company has an impressive earnings history, having outperformed the Zacks Consensus Estimate in each of the trailing four quarters.
Navios Maritime Partners LP NMM is an international owner and operator of dry cargo vessels. The company is headquartered in Piraeus, Greece. The Zacks Consensus Estimate for the company’s 2020 earnings has been revised 3.9% north in the past 60 days. The stock carries a VGM Score of B. Additionally, it has earnings per share growth of more than 200% for 2020, against the industry’s 19.4%.
Orient Overseas International Ltd. OROVY is a shipping company providing container transport and logistics services. The Zacks Consensus estimate for its 2020 earnings has been revised 6.3% upward in the last 60 days. Moreover, the company has a VGM Score of A.
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?
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