The year 2023 has seen the widely diversified Zacks Transportation sector being plagued by headwinds like high costs, supply-chain woes and a slowdown in freight demand.
In this writeup, we highlight three transportation stocks worth betting on — KNOT Offshore Partners KNOP, Air China AIRYY and Alstom ALSMY. These stocks had an unimpressive 2023 due to the headwinds but are likely to perform well in 2024.
Negatives for the Sector in 2023
Although economic activities picked up from the pandemic gloom, supply-chain disruptions continued to dent stocks in the sector. Below-par freight rates also hurt the industry’s prospects. Highlighting the weak freight demand, the Cass Freight shipments index declined 1.3% month on month in November. This measure has deteriorated month on month in seven of the 11 months reported so far this year, which confirms the overall declining trend.
High fuel costs due to the northward movement in oil prices are not a welcome development for stocks in the sector. Oil prices surged 28.5% in the third quarter of 2023 (July-September) due to the extension of production cuts by Saudi Arabia and Russia through the end of the current year. As fuel expenses represent a key input cost for any transportation player, the uptick in these costs limits bottom-line growth. The transportation sector has also been plagued by a labor crisis, due to which labor costs are on the rise.
It’s Not All Gloom and Doom
The year 2023 has seen the sector participants being blessed with some tailwinds as well. For example, the airline companies in the sector benefited from the surge in air travel demand. Driven by the concept of “Revenge travel,” a term emanating from the prolonged periods of lockdown, people remain eager to undertake a flight despite headwinds like flight disruptions caused by labor shortages. Revenge travel highlights a strong desire to travel in response to the monotony and exhaustion of life caused by the COVID-19-induced lockdown.
It is hardly surprising that the pace of e-commerce demand has slowed from the levels witnessed at the peak of the pandemic with the reopening of economies. However, it remains impressive, driven by the convenience associated with online shopping. The race to digitization also supports the momentum in e-commerce growth. E-commerce demand strength is a positive for some sector participants.
With economic activities gaining pace, more and more companies are allocating their increasing cash pile by way of dividends and buybacks to pacify long-suffering shareholders. Many transportation players have announced dividend hikes this year, reflecting their financial strength.
Likely Positives in the Coming Year
Passenger revenues are expected to remain strong in 2024. Per the International Air Transport Association (IATA), passenger revenues are expected to reach $717 billion in 2024, up 12% from $642 billion in 2023.
The freight scene is also likely to improve in the latter half of 2024, driven by a shift toward demand for goods from services. With inflation cooling, economic uncertainty is also likely to reduce, which is a huge positive. E-commerce demand is also likely to remain impressive, driven by convenience and focus on digitalization.
Given this backdrop, we have shortlisted three transportation stocks with the help of the Zacks Stock Screener. These stocks took a beating in 2023 but are likely to bounce back in 2024. Our shortlisted stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). These have shed more than 20% of their value year to date.
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You can see the complete list of today’s Zacks #1 Rank stocks here.
Our Choices
KNOT Offshore is engaged in owning, acquiring and operating shuttle tankers designed to transport crude oil and condensates from offshore oil field installations to onshore terminals and refineries. It has a market cap of $198.1 million.
Shares of the company have plunged 39.5% this year hurt by headwinds like high costs, supply-chain woes and weakness in the oil tanker market. KNOT Offshore is likely to bounce back in 2024, driven by the pickup in economic activities and an uptick in world trade. This is because the shipping industry is responsible for transporting several goods involved in world trade. The Zacks Consensus Estimate for 2024 earnings has surged 204.5% over the past 60 days. KNOP currently sports a Zacks Rank #1.
Air China currently carries a Zacks Rank #2. Shares of this Chinese carrier have slumped 28.8% so far this year. China’s zero-COVID policy (which is now abandoned) led to a sharp decline in demand, in turn hurting the carrier’s performance.
However, the outlook for 2024 is much brighter. According to many market watchers, air travel demand in the country is likely to reach pre-pandemic levels in the first half of 2024. The revival in international air travel demand is also a positive for this Chinese carrier. The Zacks Consensus Estimate for 2024 earnings has been revised 25.9% upward over the past 60 days. It has a market cap of $10.25 billion.
Alstom currently carries a Zacks Rank #2. Shares of this France-based company have plunged 45.8% year to date due to the weakness in the demand scenario.
Driven by the improvement in demand for goods, the Zacks Consensus Estimate for Alstom’s next year revenues is projected to increase 5.7% year over year. The Zacks Consensus Estimate for Alstom’s next year earnings is projected to increase 109.5% year over year.
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