The transportation sector is widely diversified in nature comprising of airlines, railroads, truckers, equipment and leasing stocks, logistics companies, among others. So far this year, the sector has been experiencing a tough time courtesy multiple headwinds like back to back hurricanes, terror attacks and driver shortages, to name a few.

Turbulence Awaits Transports in Q3?

The Q3 earnings season has seen releases from 52 S&P 500 participants as of Oct 18. In fact, the latest Earnings Trends predicts that the entire S&P 500 space will end the quarter with earnings per share and revenues improving 3% and 4.9%, respectively, on a year-over-year basis.

However, this overall bright picture is not shared by the transportation sector. Per the report, the bottom line for this key sector (one of the 16 Zacks sectors) is expected to decline 15.2% in Q3 due to high costs, on a year-over-year basis. Markedly, the same had increased 9.4% in Q2.

Disappointing Price Performance

The turbulence in the space can be gauged from the fact that the Zacks Transportation sector has underperformed the S&P 500 Index on a year-to-date basis. The sector has gained 8.3%, significantly underperforming the S&P 500’s rally of 14.4%.

Why this Slide?

The recent natural calamities (Harvey, Irma, Maria and the earthquake in Mexico) have hurt the sector participants, significantly. For example, airline operators had to cancel multiple flights leading to significant loss in revenues. In fact, the negative impact of the hurricanes is also well reflected in the key transportation earnings reports available thus far. Evidently, United Continental Holdings had to cancel 8,300 flights in the quarter and consequently its third-quarter pretax income reduced to the tune of approximately $185 million.

Additionally, these catastrophes have hurt operations of railroads by damaging important rail lines, leading to rapid increase in freight costs. In this regard, Union Pacific Corporation, which will reveal its results on Oct 26, expects Harvey to hurt its bottom line to the tune of approximately 5 cents per share in the third quarter.

Also, the sluggishness of the automotive unit is a cause of concern for railroads. For trucking companies, shortage of drivers remains a major headwind. Meanwhile, the rise in labor costs have hurt J.B. Hunt Transport Services’ third-quarter results and the trend is likely to continue in the rest of Q3.

Increase in Fuel Costs

The rise in fuel costs does not augur well for transports. This is because costs associated with oil are considered to be one of the major input for any transportation company.

Of late, fuel costs are on the rise with oil prices crossing the $50 a barrel threshold. This upsurge can be attributed to the improving demand outlook for the commodity and OPEC deal extension talks. Harvey also contributed to the same owing to gasoline shortages caused by the storm.

Some Tailwinds Remain

Despite the challenges, there are some positives for the sector participants. For example, improvement in the coal scenario has turned out to be a huge blessing for railroads as it is a key revenue generating commodity for them.

The election of Donald Trump as the President of United States last year also worked wonders for the coal industry.  This is because Trump is in favor of reviving the industry by relaxing regulations detrimental to its prospects.

Moreover, the busy Labor Day travel period (Aug 30-Sep 5) for U.S. airlines this year substantiates the strong demand for air travel, which in turn bodes well for airlines.

Additionally, the upcoming holiday season is expected to be another factor aiding the turnaround efforts of the transportation sector. Travel plans this season are likely to surge owing to a number of bullish factors like solid job growth, rising wages and increased consumer spending.

The advent of the holiday season also implies that package delivery companies like FedEx Corporation and United Parcel Service have their hands full. Markedly, they are leaving no stone unturned to meet surge in demand.

A successful holiday season for the abovementioned companies are likely to boost their stock prices as well. This, in turn, is a positive for the entire transportation sector.

How to Pick Likely Q3 Winners?

Despite the overall gloomy scenario, the aforesaid factors clearly suggest that all is not lost for transports. There exist few hidden gems in the space that investors can unearth as they have the potential to generate handsome returns.

However, given the vastness of the transportation space and the current issues, it is by no means an easy task to identify the attractive picks. This is where our proprietary model comes to the rescue.

According to our model, stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP are likely to outperform. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

More often than not, a positive earnings surprise delivered by a company leads to stock price appreciation. Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their upcoming 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 have chances of a positive earnings surprise is as high as 70%.  

Our choices

Based on the above methodology, we have zeroed in on five transportation stocks that are likely to beat the Zacks Consensus Estimate in Q3.

SkyWest Inc. (SKYW - Free Report) operates as a regional airline in the United States through its subsidiaries. The carrier has an Earnings ESP of +1.03% as the Zacks Consensus Estimate pegged at 98 cent, comes in a penny lower than the Most Accurate estimate. This Zacks Rank #3 carrier will unveil its Q3 results on Oct 25. You can see the complete list of today’s Zacks #1 Rank stocks here.

Norfolk Southern Corporation (NSC  - Free Report) provides comprehensive logistics services and offers the most extensive intermodal network on the eastern side of the United States. This Virginia-based company has a Zacks Rank #3 and an Earnings ESP of +0.67%. The Zacks Consensus Estimate, pegged at $1.66, comes in 2 cents lower than the Most Accurate estimate. The company will unveil results on Oct 25.

Landstar System (LSTR - Free Report) is a global worldwide, asset-light provider of integrated transportation management solutions. The company, which will unveil results on Oct 25, has a Zacks Rank #2 and an Earnings ESP of +2.63%. The Zacks Consensus Estimate, pegged at 96 cents, comes in 3 cents lower than the Most Accurate estimate.

Expeditors International of Washington (EXPD  - Free Report) is a leading third-party logistics provider. The company, based in Seattle, WA, is engaged in the business of global logistics management. This transportation player has a Zacks Rank #3 and an Earnings ESP of +1.68%. The Zacks Consensus Estimate, pegged at 60 cents, comes in a penny lower than the Most Accurate estimate. The company will unveil its results on Nov 7.

Scorpio Bulkers Inc. (SALT - Free Report) provides marine transportation of dry bulk commodities. The company, which is scheduled to report results on Oct 23, is likely to beat on the estimates this quarter. This is because it has a favorable combination of Zacks Rank #2 and an Earnings ESP of +7.61%.