The second-quarter 2015 earnings season is on its last lap. Sadly, revenue weakness has been witnessed across the board. A stronger dollar has turned out to be the main culprit responsible for the overall dismal season so far. Most American multinationals staggered with respect to revenue expectations in the quarter as profits continued to be thwarted by adverse currency movements.
The transportation sector was no exception to the trend. With all the S&P 500 members in the transportation space having already reported their second-quarter 2015 earnings, the aggregate earnings beat ratio is 61.5% (data as of Aug 5). Revenue beat ratio is alarmingly low at a measly 7.7%. Average earnings growth is 9.6% while year-over-year top-line growth has treaded into the negative territory and stands at -1.7% (read more:Zacks Earning Trends report).
Oil Prices Still Weak: A Major Catalyst
The transportation sector is highly diversified in nature and comprises players from multiple fields such as airline companies, truckers, shipping stocks and railroads. The sector has benefited immensely from the weakness in oil prices since oil costs form one of the major input costs for any transportation company.
Oil prices have fluctuated wildly over the past few months. Currently, prices are hovering around the $46 per barrel mark. Although oil prices are presently trending above the 6-year low of under $44/barrel touched in March 2015, they are nowhere near the highs observed in the first half of 2014. Major airline companies like Delta Air Lines (DAL) and American Airlines Group (AAL) have posted better-than-expected earnings in the second quarter of 2015, aided by low fuel costs. Going ahead, oil prices are expected to remain weak through the rest of the year. However, revenue growth has been sluggish to say the least.
Coal Woes Weigh on Railroads
As in the first quarter of 2015, weak domestic coal shipments hurt the second-quarter outcome of major railroad operators like Kansas City Southern (KSU). Moreover, adverse foreign currency movements, owing to the strengthening of the u.s. dollar, lower fuel surcharges received from customers due to declining fuel costs and sluggish carload growth from the energy sector hurt railroad stocks further.
Shipping Stocks to the Rescue?
With the airline industry engulfed in a series of controversies (ongoing probes and capacity concerns, to name a few) and railroads suffering under the weight of coal-related headwinds, stocks in both these industries are having a hard time. So, it might be the right time for investors interested in the transportation space to consider shipping stocks instead.
Shipping companies are also enjoying the fruits of lower oil prices. The slump in crude is expected to significantly reduce costs of bunker fuel prices. Moreover, tankers are also benefiting immensely from soft oil prices. By the end of last year, earnings of very large crude carriers were close to the level of $100,000 a day. Their average rates through 2014 were also the best in nearly four years. Weak oil prices will continue to boost demand for tankers, which in turn, should result in higher rates for shipping companies. The rising Baltic Dry Index this year is a major positive for the dry bulk shipping industry.
