Zacks Investment Ideas feature highlights: Southwest Airlines, Norfolk Southern and Canadian Pacific Railway

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Jan 17, 2014, 09:30 ET

CHICAGO, Jan. 17, 2014 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: Southwest Airlines Co. (NYSE:LUV-Free Report), Norfolk Southern Corporation (NYSE:NSC-Free Report) and Canadian Pacific Railway Limited (NYSE:CP-Free Report).

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Wheels Roll in Transportation, 3 Stocks Set to Beat

In the wake of the World Bank's revised outlook on the global economy, we are hopeful that the fourth quarter results of the U.S. stocks will bring the mojo back for investors, who have otherwise endured significant volatilities throughout 2013. Further, encouraging U.S. retail data that uplifted the greenback leaves little scope for any pessimism going forward.

The transportation sector too will benefit from the broader optimism and we look forward to outperformance by some of its stocks. Not only does the current momentum in the macro economy work in favour of these stocks, the industry fundamentals also continue to improve. From a modest beginning to a strong third quarter, these stocks have proved their mettle, driving us to crown them as our top picks.

Why Transportation is an Attractive Bet?

While fourth quarter results are underway, we are yet to see the major actions in Transportation with only 9.1% of the sector participants having reported. Overall, the sector is expected to register a double-digit (17%) earnings improvement, stemming from steady growth in airlines and railroad stocks.

According to the International Air Transport Association (IATA), the 2014 outlook on the global airline industry looks promising with profitability estimated at $16.4 billion on a passenger count of 3.30 billion. Net profit margin is also expected to grow 2.2%. Economic recovery and the resultant surge in air travel demand, disciplined capacity and many new and enhanced ancillary revenue opportunities would contribute to growth this year.

Railroads' operating performance too seems to have bounced back amid coal woes thanks to operational efficiency, increased market demand for intermodal services as well as shipment of key commodities like petroleum products, automotives and grain crop.

In such a scenario, it might be a good idea to zero-in on a handful of transportation stocks that are poised to beat earnings estimates this quarter. An earnings surprise should help these stocks outperform in the near term.

How to Find a Top Pick

Stock diversity in the transportation arena could muddle up your picking power. An easy way to narrow down the list for your portfolio is to take a look at stocks with solid Zacks Rank and favorable Zacks Earnings ESP.

Earnings ESP is our proprietary methodology for determining stocks having the best chance to surprise with their next earnings announcement. The earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus.

The combination of a positive to neutral Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive earnings ESP, is usually a harbinger of earnings beat.

For investors seeking to benefit by applying this strategy, we have chosen three transportation stocks that we believe will exhibit significant upward potential following their upcoming earnings announcement.

Southwest Airlines Co. (NYSE:LUV-Free Report): Dallas-based Southwest Airlines provides low cost passenger air transportation services in the U.S. It primarily provides short-haul, high frequency, point-to-point airline services covering many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore/Washington International, Burbank, Manchester, Oakland and San Jose. In May 2011, Southwest completed the acquisition of AirTran Holdings, which now operates as a wholly owned subsidiary under the name AirTran Airways. As of Sep 30, 2013, Southwest operated 696 Boeing aircraft and served 97 destinations along with AirTran.

The Zacks Consensus Estimates for fourth-quarter is 28 cents, representing robust growth over the year-ago quarter. The company registered an average earnings surprise of 41.40% over the trailing 12 months.

The company presently carries a Zacks Rank #1 and has an earnings ESP of +7.14%. Southwest Airlines is set to report its fourth quarter results on Jan 23, before the opening bell.

Norfolk Southern Corporation (NYSE:NSC-Free Report): Headquartered in Norfolk, Virginia, Norfolk Southern Corp. owns a major freight railroad Norfolk Southern Railway, which also represents a Class I railroad in the U.S. The company operates over 20,000 route miles across 22 Eastern states in the U.S. The company offers rail transportation of commodities like coal and other raw materials, intermediate products and finished goods. It also offers comprehensive logistics and most extensive intermodal services on the Eastern part of the U.S. and caters to overseas freight through several Atlantic and Gulf Coast ports.

The Zacks Consensus Estimate for the fourth quarter is $1.50. This represents a year-over-year improvement of 15.7%. The company delivered average earnings surprise of 5.01% over the trailing 12 months.

Norfolk Southern has an earnings ESP of +0.67% and retains a Zacks Rank #3 (Hold). The company is slated to release its fourth quarter results on Jan 22.

Canadian Pacific Railway Limited (NYSE:CP-Free Report): Based in Calagary, Alberta, Canadian Pacific is another Class I railroad that provides rail freight transportation services to the principal business centers of Canada from Montreal to Vancouver, as well as the U.S. covering major cities like Chicago, New York City, Detroit and Minneapolis. The company has extended its network through collaborations with other Class I railways in North America, which allows it to provide services and access to markets across North America beyond its own rail network.

Currently, the Zacks Consensus Estimate for fourth-quarter is $1.87 with growth expectation of 46.3% from the prior-year quarter. The company boasts an average earnings surprise of 1.49% over the trailing 12 months.

Canadian Pacific currently holds a Zacks Rank #3 and has an earnings ESP of +1.60%. The carrier is slated to report its fourth quarter financial results on Jan 29, before market opens.

Moving Forward

Conscious efforts to turn around are evident in the economy at large. The transportation sector is also riding on the upturn with palpable improvements in the fundamentals of airline and railroad stocks.

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