Transportation Stocks: Good Earnings Unlikely to Encourage Buying

Transportation StocksOne sector of the domestic economy that should continue to produce solid corporate earnings is transportation stocks.

Higher freight volumes, higher freight prices not affecting demand, and lower fuel prices are a solid combination that should boost the bottom line for airlines, freight companies, and railroads.

Similar industry dynamics continue among lodging and restaurant companies. While it’s still very much a slow-growth environment, there are positive glimmers in the marketplace. The big question is: will the market bet on it further?

Good Corporate Earnings in Transportation Stocks

FedEx Corporation (FDX) had a pretty good quarter recently. In its three months ended February 28, 2015, the company’s sales improved four percent comparatively to $11.7 billion, while corporate earnings grew a substantial 53% to $580 million.

A dramatic drop in fuel expenditures to the tune of 30% from the same quarter last year, as well as improved operating income with both FedEx Express and FedEx Ground, contributed to the bottom-line improvement.

FedEx expects to produce record corporate earnings in its upcoming fiscal fourth quarter and year-end 2015.

Good corporate earnings also came from railroad services, an old economy industry sector that’s been experiencing a renaissance in demand due to the need for oil and commodity railcars as well as the retrofit market.

The Greenbrier Companies, Inc. (GBX) is a major railroad freight car manufacturer and parts supplier. The Oregon-based company also produces marine barges serving the resource industry.

Greenbrier is a company I’ve highlighted before in these pages. (See “One Industry That’s Holding Up the Rest.”) Last year, the stock experienced a material price retrenchment, but it’s on the comeback trail now. The firm just announced record results with a large order backlog and upwardly revised guidance.

Fiscal 2015 second-quarter sales (ended February 28, 2015) improved 26% to $630 million due to increased deliveries. For any business, this top-line growth is exceptionally good. Corporate earnings improved 223% to $50.4 million.

The company’s new railcar backlog as of the end of February is now 46,000 units, representing the sixth consecutive quarter of order backlog growth.

Greenbrier’s earnings handedly beat Wall Street expectations and so did revenues. Fiscal year 2015 total guidance was increased and the stock should experience some upward price momentum, as it is not expensively priced.

Earnings Results Already Priced In

So there’s good potential for corporate earnings to come through once again among transportation-related businesses.

But this is a relative expectation. I still think it’s reasonable to expect muted responses in this market, even when companies report double-digit corporate earnings growth.

The stock market, being a forward-looking secondary market pricing system, already has low expectations for earnings this year. For transportation stocks, despite industry fundamentals that are holding up, all the good news is mostly priced into the sector. Solid demand with lower oil prices is now well quantified by the investing marketplace.

Accordingly, investors should not overweight transportation stocks in any portfolio.