If manufacturing is the backbone of the economy, then transportation companies are the arteries and veins that allow goods services, and people to flow through the economy. Concerns about rising oil prices and lower consumer demand are casting a pall on this sector. But knowing the market is forward-looking, now is a good time to look for undervalued transportation stocks.
Rising oil demand, infrastructure spending, and continued strength in the travel industry are three themes that are likely to drive growth in this sector. Investors have several options that allow them to find companies that are well-positioned to profit from these themes.
Using a simple stock screener, I looked for transportation stocks with a forward P/E ratio of 18x or less. I used 18x because that’s where the S&P 500 is currently priced. But that’s likely to go down as the 10-year U.S. treasury yield continues to rise. To add some variety, you get one stock by land, sea, and air.
Delta Air Lines (DAL)
Delta Air Lines (NYSE:DAL) is one of several undervalued transportation stocks in the airline industry. Many investors were expecting a pullback in airline stocks in 2023 as the industry faced tough comparisons from a blowout in 2022.
That hasn’t been the case. One of the ongoing mysteries in the economy is the stickiness of revenge travel. Every quarter, investors expect to see weaker demand. But as of the second quarter earnings season, there’s no big slowdown in sight. That fact was reflected in Delta’s earnings report.
The company just posted $2.68 earnings per share on revenue of $15.58 billion. Not only did both numbers beat expectations, but they were also higher on a year-over-year (YOY) basis. Plus, the company is guiding for higher revenue and earnings in the second half, backed by its decision to reinstate its dividend.
The continuation of remote and hybrid work arrangements will continue to be bullish for Delta. But it’s also likely that with many homeowners locked into a low-interest rate mortgage, and with home improvement projects having been done in 2020 and 2021, they’ll continue to put that discretionary income into travel.
CSX Corporation (CSX)
Infrastructure spending continues to flow into the economy as many manufacturers race to get factories built to take advantage of onshoring incentives. One way for investors to take advantage of this trend is with railroad stocks, and CSX Corporation (NYSE:CSX) is one of the best names in the sector.
If you’re looking for eye-popping growth, CSX stock isn’t for you. If, however, you’re looking for stable revenue and earnings in addition to a stable dividend, then this railroad stock is worth a closer look.
For example, in its second-quarter earnings report in July, the company’s top-line and bottom-line results were basically flat based on analysts’ expectations. They were also essentially flat on a YOY basis. That’s not exciting for growth investors, but at a time when home runs are hard to come by, CSX offers investors a solid single with a reliable dividend that has a 1.44% yield.
Analysts are generally bullish on CSX. The stock is covered by 29 analysts and 18 of them have a strong buy or buy rating on the stock. Plus, the average price target of $36.27 is 18% higher than the current price.
Scorpio Tankers (STNG)
Scorpio Tankers (NASDAQ:STNG) is one of the leading global shipping companies engaged in the seaborne transportation of refined petroleum products. Its modern fleet makes it one of the most environmentally friendly carriers. It’s also one of the more undervalued transportation stocks to consider.
STNG stock is flat for the year, down over 10% since April, and up 28% in the last 12 months. That’s the kind of volatility investors expect in the global oil shipping industry. And much of the stock’s recent performance is due to the company’s recent earnings report.
The company’s revenue came in at $329 million. This not only missed the consensus estimate by $!4.8 million, but it also came in 187% lower year-over-year. The bottom line also came in eight cents lighter than expected at $2.41.
One risk to owning STNG stock may come from China. The country’s reopening was one reason the International Energy Administration forecasted that global oil demand would reach a record 102 million barrels per day this year. However, recent economic news from China shows an economy that remains under pressure even with pandemic restrictions being lifted.
That said, Scorpio has a solid balance sheet that includes no new builds on order and $1.2 billion of debt reduced in 2022. Plus, investors get a dividend that currently yields 1.92% and has an annual payout of $1 per share.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
