Zacks’ transportation sector is widely diversified in nature, with airlines, railways, package delivery companies and truck drivers, to name a few who are fighting for space. It is no secret that the year 2020, which is coming to an end, has not been great for this largely fragmented domain so far. Although the advent of the coronavirus has affected most corners of the investment sphere, the transport area is one of the hardest hit.
Headwinds that hit the sector heavily: a setback
Airline shares in the sector are hampered by the reduction in passenger revenues, which represent the majority of its revenue. Passenger revenues have been weak in the year so far due to below-average air travel demand amid coronavirus-induced blockages and several other government-imposed travel restrictions.
As a result, airline heavyweights, including the likes of Delta Airlines DAL suffered significant losses in each of the first three quarters of 2020. According to IATA, the industry is expected to incur an impressive net loss of $ 118.5 billion in 2020. Passenger revenues are expected to be only $ 191 billion, compared to $ 612 billion recorded in 2019.
Railroads in the domain are shaken by gloomy freight revenues, as interruptions induced by the coronavirus have led to a sharp decline in transport volumes. The pandemic also wreaked havoc on the sector’s shipping stocks by substantially slowing international trade. Demand problems led by the coronavirus have put the oil and gas market at risk due to reduced oil field activity and low oil prices.
Some Tailwinds
Despite the economy going into a bolt because of pandemic stress, there were some positive points, due to which the Zacks transport sector has increased 12.6% so far this year.
With the coronavirus confining people mainly in their homes, the need to deliver essential products door to door during this unprecedented crisis is experiencing a meteoric rise. E-commerce, which has already become an integral part of our daily lives in today’s fast-paced world, is witnessing strong demand now amid protocols of social detachment induced by the pandemic, quarantines and blockages. Due to this increase in residential delivery volumes, package delivery companies like United Parcel Service UPS and FedEx Corporation FDX has benefited immensely.
The airlines’ focus on cargo revenues in the face of deflated passenger revenues is another positive side. IATA expects cargo revenues in 2020 to increase from $ 102.4 billion in 2019 to $ 117.7 billion. Moderate fuel costs have also helped transport inventories this year, reducing their expenses in the wake of depressed revenues.
The gradual improvement in the freight scenario is another positive aspect and can be measured by the fact that, according to the latest report from the Cass Freight Shipments Index, shipment volumes increased 2.7% year on year. Notably, this was the second consecutive month that the metric has improved year after year since November 2018.
The prospects look stronger as we head for 2021
The recent approval of the Pfizer The PFE / BioNTech COVID-19 vaccine in many countries, including the United Kingdom and the United States, after exhibiting a high degree of effectiveness in clinical trials, is a great benefit. Notably, vaccination has already started with UPS and FedEx playing an active role in the distribution of vaccines in the United States. In fact, another vaccine, developed by Moderna, is also approved by the FDA.
The availability of vaccines, with a few more awaiting release next year, is expected to bring a sick economy to life, encouraging people to resume normal tasks, keeping fear of infection under control. For example, the demand for air travel is expected to increase, benefiting airlines. In addition, the freight scenario, which is already improving in the United States as mentioned above, should be further galvanized in 2021, as shipping volumes expand with the gradual restoration of economic activities. This should mainly assist railway operators and truck drivers in the sector. In addition, the increase in the 2020 online shopping curve is likely to continue in 2021 as well.
In light of the advantages mentioned above, we believe that transportation actions currently present attractive investment opportunities.
Our choices
Here, we have reduced to four transport actions that are well positioned to benefit from the trends mentioned above. In addition to currently having a Zacks # 1 (strong buy) or 2 (buy) rating, these stocks offer a lot of growth potential. You can see the complete list of today’s Zacks # 1 Rank stocks here.
In addition, these shares have surpassed the S&P 500 so far this year.
UPS: The exponential growth rate of e-commerce in the current scenario is a major advantage for this Atlanta-based company, which currently carries a Zacks Rank # 2. We are also encouraged by UPS’s ability to generate solid free cash flow.
In 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: This Phoenix, AZ-based truck carrier currently carries a Zacks Rank 2. The company’s efforts to control costs are also encouraging. Evidently, its adjusted operating index (operating expenses as% of revenue) improved to 86.6% in the first nine months of 2020 from 88.6% in the same period of 2019 at lower costs. The improvement in freight conditions is also a good omen for the stock. The company expects this strong freight scenario to remain here.
In 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): The company is a third party supplier of aircraft and aviation operational services. In the past 60 days, this company currently ranked No. 1 by Zacks has seen Zacks’ consensus estimate for 2021 increase by 11.3%.
Atlas Air gains momentum with the strong demand for airfreight in the coronavirus-ravaged scenario. The explosion of e-commerce trends is a big relief. The rise of online sales has emerged as a key catalyst for cargo carriers. The company currently has a growth score of A.
ArcBest Corporation ARCB offers cargo transport solutions and services. The best shipping conditions bode well for the stock that currently boasts a Zacks Rank # 1. In the past 60 days, the company has seen the Zacks consensus estimate for 2021 increase by 29.1%. ArcBest has a growth score of B.
Zacks Top 10 Stocks for 2021
In addition to the actions discussed above, would you like to know about our top 10 tickers for the entire year 2021?
These 10 are carefully handpicked from over 4,000 companies covered by Zacks Rank. They are our primary choices for buying and maintaining. Start your access to the new Zacks Top 10 Stocks >>
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Pfizer Inc. (PFE): Free Stock Analysis Report
United Parcel Service, Inc. (UPS): Free inventory analysis report
Delta Air Lines, Inc. (DAL): Free Stock Analysis Report
FedEx Corporation (FDX): Free Stock Analysis Report
KnightSwift Transportation Holdings Inc. (KNX): Free Stock Analysis Report
ArcBest Corporation (ARCB): Free stock analysis report
Atlas Air Worldwide Holdings (AAWW): Free inventory analysis report
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