Q3 Earnings Drags Transport ETFs Lower

The transportation sector is struggling this earnings season with total earnings from 97.9% of the sector's total market capitalization that has reported so far down 14.2% despite revenue growth of 5.1%. This is much below earnings growth of 9.6% and revenue growth of 10% for the same period, in the last reporting cycle (read: 5 Sector ETFs for Revenue Growth Play).

Earnings and revenue beat ratio of 69.2% and 61.5%, respectively, are also disappointing despite the fact that most of the industry players dominating the sector managed to beat our estimates on earnings or revenues or both.

For a better understanding, let's dig into the earnings results of some well-known industry players:

Transportation Earnings in Focus

The world's largest package delivery company United Parcel Service UPS topped the Zacks Consensus Estimate on both fronts. Earnings of $1.45 surpassed our earnings estimate by a penny while revenues of $15.98 billion edged past the estimated $15.61 billion. For fiscal 2017, the company narrowed its earnings per share guidance range from $5.80-$6.10 to $5.85-$6.10. The Zacks Consensus Estimate at the time of earnings release was pegged at $6.00.

The major railroads Union Pacific UNP, Kansas City Southern KSU and Norfolk Southern Corp NSC also beat on both the top and bottom lines. NSC outpaced the earnings estimate by a wide margin of 11 cents while earnings at UNP and KSU came ahead by a penny and three cents, respectively. Revenues for the three railroads trumped their Zacks Consensus Estimate by $102 million, $9 million and $40 million, respectively.

Ryder Systems R, the leader in supply chain management and fleet management services, beat the earnings estimate by four cents and revenue estimate by $42 million.

The two largest U.S. airlines Delta Air Lines DAL and United Continental UAL reported better-than-expected results but the latter lagged on revenues. Earnings of $1.57 and revenues of $11.1 billion at Delta edged past the Zacks Consensus Estimate of $1.54 and $11.03 billion, respectively. At United Continental, earnings per share of $2.22 came above the Zacks Consensus Estimate of $2.18 but revenues of $9.878 billion slightly fell shy of the estimated $9.88 billion (read: Will Airline ETF Crash on Subdued Q3 or Take Off on Value?).

Last but not the least, earnings for the leading trucking carrier J.B. Hunt JBHT came in below the Zacks Consensus Estimate by a nickel but revenues were $28 million above the estimate.

ETFs in Focus

Given this, the sector saw a 2.3% average decline (average price difference between a day before and after the earnings announcement of a stock) in response to earnings announcements. As such, both transport ETFs, iShares Dow Jones Transportation Average Fund IYT and SPDR S&P Transportation ETF XTN, saw rough trading in the past one month. IYT shed 1.6% while XTN was down 0.4%. Both funds have an unfavorable Zacks ETF Rank #4 (Sell) rating with a High risk outlook (see: all the Industrials ETFs here).

IYT

The fund tracks the Dow Jones Transportation Average Index, giving investors exposure to a small basket of 20 securities. The fund has a certain tilt toward large-cap stocks at 55% while mid and small caps account for 26% and 19% share, respectively, in the basket. Though the product is heavily concentrated on the top firm FedEx FDX at 14.3%, the in-focus eight firms collectively make up for 47.2% of the portfolio. From a sector perspective, air freight & logistics takes the top spot with 30.8% of the portfolio while railroads, trucking and airlines round off to the next three spots with double-digit exposure each. The fund has accumulated nearly $799.2 million in AUM while sees solid trading volume of around 258,000 shares a day. It charges 44 bps in annual fees.

XTN

This fund tracks the S&P Transportation Select Industry Index, holding 43 stocks in its basket. It is skewed toward small caps at 47% while the rest is split between mid and large caps. As a result, the in-focus firms account for over 2% share each. Further, about 32.3% of the portfolio is dominated by trucking, while airlines takes one-fourth share. Airfreight & logistics, and railroads also make up for a double-digit allocation each. With AUM of $194.6 million, the fund charges 35 bps in fees per year from investors and trades in a lower volume of around 22,000 shares a day (read: ETFs to Buy After Weak Jobs Report).



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Delta Air Lines, Inc. DAL: Free Stock Analysis Report
 
United Continental Holdings, Inc. UAL: Free Stock Analysis Report
 
Ryder System, Inc. R: Free Stock Analysis Report
 
Kansas City Southern KSU: Free Stock Analysis Report
 
Union Pacific Corporation UNP: Free Stock Analysis Report
 
Norfolk Souther Corporation NSC: Free Stock Analysis Report
 
J.B. Hunt Transport Services, Inc. JBHT: Free Stock Analysis Report
 
ISHARS-TRAN AVG IYT: ETF Research Reports
 
SPDR-SP TRANSPT XTN: ETF Research Reports
 
United Parcel Service, Inc. UPS: Free Stock Analysis Report
 
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