The Zacks Transportation sector is widely diversified in nature with airlines, railroads, package delivery companies and truckers to name a few jostling for space. It is no secret that the year 2020, which is on its tail end, has not been hunky-dory for this widely fragmented domain so far. Even though the advent of coronavirus hurt most corners of the investing sphere, the transportation arena is one of the worst hit.
Headwinds That Hit the Sector Hard: A Throwback
The airline stocks in the sector are crippled by dwindling passenger revenues, which account for majority of their top line. Passenger revenues have been lackluster year to date due to below-par air-travel demand amid coronavirus-induced lockdowns and various other government-imposed travel restrictions.
As a result, airline heavyweights including the likes of Delta Air Lines (DAL – Free Report) incurred significant losses in each of the first three quarters of 2020. Per the IATA, the industry is expected to incur a staggering net loss of $118.5 billion in 2020. Passenger revenues are anticipated to be a mere $191 billion compared with $612 billion recorded in 2019.
Railroads in the domain are rattled by dismal freight revenues as coronavirus-induced disruptions induced a sharp decline in shipment volumes. The pandemic also wreaked havoc on the shipping stocks in the sector by substantially decelerating international trade. The coronavirus-led demand woes jeopardized the oil and gas market due to ramped-down oilfield activity and low oil prices.
Despite the economy going into a tailspin because of the pandemic stress, there were some bright spots owing to which the Zacks Transportation sector has increased 12.6% so far this year.
With coronavirus confining people mostly to their homes, the need for door-to-door delivery of essentials during this unprecedented crisis is seeing a meteoric rise. E-commerce, which already became part and parcel of our daily lives in today’s fast-paced world, is now witnessing steep demand now amid the pandemic-induced social-distancing protocols, quarantines and lockdowns. Owing to this surge in residential delivery volumes, package delivery companies like United Parcel Service (UPS – Free Report) and FedEx Corporation (FDX – Free Report) benefited immensely.
The focus of airlines on cargo revenues in the face of deflated passenger revenues is another upside. IATA expects cargo revenues for 2020 to increase to $117.7 billion from $102.4 billion in 2019. Moderate fuel costs also aided transportation stocks this year by reducing their expenses in the wake of depressed revenues.
The gradual improvement in the freight scenario is another positive and can be gauged from the fact that per the latest Cass Freight Shipments Index report, shipment volumes inched up 2.7% on a year-over-year basis. Notably, this was the second consecutive month wherein the metric bettered year over year since Nov 2018.
Prospects Look Stronger as We Head for 2021
The recent approval of the Pfizer (PFE – Free Report) /BioNTech COVID-19 vaccine in many countries including the UK and the United States after displaying a high degree of efficacy rate in clinical trials is a huge boon. Notably, vaccination already started with UPS and FedEx playing an active role in the distributing the vaccines across the United States. In fact, another vaccine, developed by Moderna, is also approved by the FDA.
The availability of the vaccines with a few more awaiting clearance next year, should breathe life into a sick economy by encouraging people to resume their normal chores, keeping the fear of infection at bay. For instance, air-travel demand should pick up, thereby benefiting airlines. Moreover, the freight scenario, which is already improving in the United States as stated above, should be galvanized further in 2021 as shipment volumes expand with the gradual restoration of economic activities. This should aid mainly the railroad operators and truckers in the sector. Also, the ballooning of the 2020 on-line shopping curve is likely to be maintained in 2021 as well.
In light of the above-mentioned upsides, we believe, transportation stocks currently boast attractive investment opportunities.
Here we narrow down to four transportation stocks that are well-positioned to benefit from the above-mentioned trends. Apart from presently carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy), these stocks offer plenty of growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
Moreover, these stocks have outperformed the S&P 500 so far this year.
UPS: The exponential e-commerce growth rate in the current scenario is a huge plus for this Atlanta-based company, which currently carries a Zacks Rank #2. We are also encouraged by UPS’ ability to generate solid free cash flow.
Over the past 60 days, the company has seen the Zacks Consensus Estimate for 2021 move 4.8% north. UPS has a Growth Score of B.
Knight-Swift Transportation Holdings (KNX – Free Report) : This Phoenix, AZ-based truckload carrier currently carries a Zacks Rank of 2. The company’s efforts to control costs are encouraging too. Evidently, its adjusted operating ratio (operating expenses as a % of revenues) improved to 86.6% in the first nine months of 2020 from 88.6% in the same period of 2019 on lower costs. Improving freight conditions also bode well for the stock. The company expects this strong freight scenario to stay here.
Over the past 60 days, the company has seen the Zacks Consensus Estimate for 2021 move 2.8% north. Knight-Swift has a Growth Score of B.
Atlas Air Worldwide Holdings (AAWW – Free Report) ): The company is a provider of outsourced aircraft and aviation operating services. Over the past 60 days, this presently Zacks #1 Ranked company has seen the Zacks Consensus Estimate for 2021 being increased 11.3%.
Atlas Air gets an impetus from strong demand for airfreight in the coronavirus-ravaged scenario. The explosion in e-commerce trends is a huge relief. The ascent in online sales emerged as a key catalyst for the cargo carriers. The company currently has a Growth Score of A.
ArcBest Corporation (ARCB – Free Report) offers freight transportation services and solutions. The improving freight conditions augur well for the stock that currently sports a Zacks Rank #1. Over the past 60 days, the company has seen the Zacks Consensus Estimate for 2021 being raised 29.1%. ArcBest has a Growth Score of B.