The Zacks Analyst Blog Highlights: Kansas City Southern, Canadian Pacific Railway, Atlas Air Worldwide Holdings, FLY Leasing and Teekay

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Oct 31, 2014, 09:30 ET

CHICAGO, Oct. 31, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Kansas City Southern (NYSE:KSU-Free Report), Canadian Pacific Railway Limited (NYSE:CP-Free Report), Atlas Air Worldwide Holdings, Inc. (Nasdaq:AAWW-Free Report), FLY Leasing Limited (NYSE:FLY-Free Report) and Teekay Corporation (NYSE:TK-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Thursday's Analyst Blog:

Green Light for These Transportation Stocks

Buoyed by improving economic trends, the transportation sector is stepping on the gas to zoom ahead of other sectors this earnings season. Tailwinds such as higher consumer demand, lower fuel costs and a boost in manufacturing activity are propelling the performance of the sector that serves as a leading indicator of economic growth.

The sector is driven primarily by macroeconomic trends. The outlook for the U.S. economy is healthy, with the International Monetary Fund (IMF) expecting GDP growth of 3.1% in 2015, up from an expected 2.2% GDP expansion in 2014. Also, unemployment continues to trend lower, boosting consumer demand. These factors bode well for the sector as it gains from steadily recovering manufacturing and retail markets.

Striking Q3 Earnings Picture

In the last season, the transportation sector emerged as one of the strongest performers, with companies neatly beating earnings and revenue estimates. The sector registered year-over-year earnings growth of 11.5%, with a massive 82% of the companies posting positive earnings and revenue surprises.

It appears that the sector is determined to keep the ball rolling in the now-being-reported quarter. So far, about 90.9% of the companies in the transportation sector have reported their third-quarter results, with 80% of these registering positive earnings surprises.

(For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)

Speeding Stock Prices

Transportation stocks have been witnessing the most impressive rally since 2011, with strong performance across the entire spectrum – from airlines to railroads. The rally has been powered by impressive third-quarter results as cheap fuel, improving fundamentals and robust consumer demand paint a rosy picture for the future.

To put it in context, the Dow Jones Transportation Average (DJT), an established gauge of the American transportation sector, rose nearly 13% over the past fortnight. The surge was driven by robust price appreciation from industry bellwethers on the back of solid financial results.

The DJT has also outperformed the S&P 500 over a longer time frame, as evidenced by the following chart:

Within the broader sector, last month proved to be a bleak one for airline stocks over Ebola concerns and ebbing foreign market demand. However, the group got back on its feet with strong earnings driven by cheap oil and increased price traction. (Read the latest developments in the airline sector here: Airline Stock Roundup)

Railroad operators like Kansas City Southern (NYSE:KSU-Free Report) and Canadian Pacific Railway Limited (NYSE:CP-Free Report) are benefiting from consumer demand strength, a surge in transportation of crude oil and other energy-related materials, and better pricing power. Also, the shipping industry stands to gain from a strengthening economic activity and dwindling oil and commodity costs, which enhance demand and diminish input costs.

All these factors have translated into strong earnings for most companies in the sector, thus contributing to the remarkable rally in stock prices.

Plenty of Steam Left

With the U.S. economic growth accelerating, the transportation sector is well poised to capitalize on the improved prospects. The economic indicators affecting the transportation sector including housing starts and automobile production, in addition to the Purchasing Manager's Index and Customer Inventory Index – all indicate sustained expansion for the sector, going forward. The sector's earnings are expected to surge 13.7% year over year in the last quarter of 2014 and a massive 25.4% in first-quarter 2015.

Although we are at the tail end of the third-quarter earnings season, there is still an opportunity for the late risers to profit from the sector's strong uptrend. The current backdrop seems ideal to bank on a few stocks that are likely to beat earnings estimates in their upcoming announcements. A positive earnings surprise should propel these stocks to outperform the market in the near term.

Sifting out Potential Outperformers

The sheer diversity of stocks in the transportation sector could make identifying stocks with the potential to beat estimates appear intimidating. An easy way to narrow down choices is to screen them with favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP.

Earnings ESP – the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate – is our proprietary methodology for distinguishing stocks that have a high chance of beating estimates in their next earnings announcements.

The combination of a favorable Zacks Rank and a positive Earnings ESP usually heralds an earnings beat. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

It is nearly indisputable that an earnings beat bolsters investors' confidence in the stocks, which translates into quick price appreciation. For investors seeking to ride the wave of growth in the sector this season, we present three transportation stocks that have the right combination of elements to beat earnings estimates.

Atlas Air Worldwide Holdings, Inc. (Nasdaq:AAWW-Free Report) has a Zacks Rank #2 and an Earnings ESP of +8.14%. Zacks Consensus Estimate for the third quarter for this air transport stock is pegged at 86 cents per share. The company boasts an immaculate earnings surprise history, with the trailing four quarters registering an average beat of 97.8%. We expect the company to beat expectations in this quarter as well.

Atlas Air Worldwide is a cargo and passenger plane charter airline that provides wet and dry leasing services to customers including freight forwarders, commercial airlines, and the U.S. military. It operates the world's largest fleet of the Boeing Company's (BA) Boeing 747 and 767 freighters and passenger aircraft. Responding to an expected decline in military cargo needs, the company is diversifying its revenue base by capitalizing on its dominant market position in outsourced aircraft and services. With steady cyclical pickup in global economic growth, the company expects to gain from strong growth in air freight demand.

Atlas Air Worldwide is scheduled to announce its third-quarter 2014 financial results on Nov 6.

FLY Leasing Limited (NYSE:FLY-Free Report) has a Zacks Rank #2 and an Earnings ESP of +10.71%. Zacks Consensus Estimate for the third quarter for this equipment & leasing stock is pegged at 28 cents per share. The company has an impressive earnings surprise history, with the trailing four quarters registering an average beat of 347.8%. We expect the company to beat expectations in the third quarter as well.

Based in Dublin, Ireland, FLY Leasing is engaged in acquiring and leasing modern, high-demand and fuel-efficient commercial jet aircraft under long-term contracts to airlines worldwide. The company's strategy is to effectively manage its fleet and continuously expands its portfolio through aircraft acquisition. FLY Leasing has acquired 16 aircrafts worth over $660 million this year, which emphasizes its focus on boosting fleet profitability and aligning its offerings with the demand scenario as global air traffic growth continues to outpace historical trends.

FLY Leasing is scheduled to announce its third-quarter 2014 financial results on Nov 13.

Teekay Corporation (NYSE:TK-Free Report) has a Zacks Rank #3 and an Earnings ESP of +90.00%. Zacks Consensus Estimate for the third quarter for this air transport stock is pegged at 86 cents per share. The company boasts an immaculate earnings surprise history, with the trailing four quarters registering an average beat of 97.8%. We expect the company to beat expectations in the coming quarter as well.

Headquartered in Bermuda, Teekay Corporation is a shipping company involved in marine transportation services for crude oil and gas. The company serves internationally and owns approximately 170 liquefied gas, offshore and conventional tanker assets. With global energy demand rising and the ban on U.S. crude oil exports softening, shipping companies like Teekay Corporation are preparing to capitalize on the crude export boom.

Teekay Corporation is scheduled to announce its third-quarter 2014 financial results on Nov 6.

Smooth Road Ahead?

Recent indications of a sustainable turnaround in the economy are unmistakable. As the lifeblood of the economy, the transportation sector is expecting significant progress in the fundamentals of airline, shipping and railroad stocks, with numerous economic tailwinds aiding growth. The Ebola crisis and volatility in the energy market continue to be a risk, but as of now, it seems that all is going well for the sector.

We therefore believe that the time is ripe to jump on the growth bandwagon in the transportation space, and what better to start that with than investing in stocks with strong earnings beat potential?

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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