Transport ETFs Look Bright Post Solid Q3 Earnings

The transportation sector has been on a smooth ride this earnings season with stock prices up 1.3% (aggregate one-day stock market reaction to earnings releases) in response to earnings announcements. Total earnings of 97.7% of the sector’s total market capitalization that has been reported so far is up 24.3% on revenue growth of 9.6%. This is much better than Q2’s earnings growth of 16.1% and revenue growth of 8.5% (read: Top-Ranked Sector ETFs & Stocks to Buy Now).

Earnings and revenue beat ratios of 69.2% and 84.6%, respectively, are also encouraging as most of the industry players dominating the sector managed to beat the Zacks Consensus Estimate 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 (NYSE:UPS) met the Zacks Consensus Estimate on earnings and beat on revenues. Earnings of $1.82 were in line with the estimate while revenues of $17.44 billion edged past the estimated $17.41 billion. For 2018, the company continues to expect earnings per share in the range of $7.03-$7.37. The Zacks Consensus Estimate at the time of earnings release was pegged at $7.25.

Major railroads Norfolk Southern Corp (NYSE:NSC) and Union Pacific (NYSE:UNP) topped both the estimates. NSC outpaced earnings estimates by 8 cents, while earnings at UNP came ahead by 6 cents. Revenues trumped the Zacks Consensus Estimate by $43 million and $50 million, respectively. Meanwhile, Kansas City Southern (NYSE:KSU) lagged on both fronts missing earnings estimate by a penny and revenue estimates by $8 million.

Ryder Systems (NYSE:R) , the leader in supply chain management and fleet management services, beat earnings estimates by a penny and revenue estimates by $47 million (see: all the Industrials ETFs here).

The two largest U.S. airlines Delta Air Lines (NYSE:DAL) and United Continental (NASDAQ:UAL) reported mixed results. This is because Delta topped earnings estimate by 6 cents while lagged on revenue estimates by $4 million. On the other hand, United Continental missed on earnings by 3 cents but beat on revenue estimates by $35 million.

Last but not the least, earnings of the leading trucking carrier J.B. Hunt (NASDAQ:JBHT) also came in above the Zacks Consensus Estimate by 7 cents. Revenues of $2.21 billion beat the consensus estimate by $4 million.

ETFs in Focus

Despite strong results, a broad market sell-off took the sheen from transport ETFs over the past month. As such, iShares Dow Jones Transportation Average Fund IYT, SPDR S&P Transportation (NYSE:XTN) ETF XTN and First Trust Nasdaq Transportation ETF (NYSE:R) have shed 7.5%, 5.8% and 3.6%, respectively.

IYT

The fund tracks the Dow Jones Transportation Average Index, giving investors exposure to a small basket of 20 securities. Though the product is heavily concentrated on the top firm FedEx (NYSE:FDX) at 13.4%, the in-focus eight firms collectively make up for half of the portfolio. From a sector perspective, air freight & logistics takes the top spot with 28.7% share while railroads, airlines and trucking round off the next three spots with double-digit exposure each. The fund has accumulated nearly $671.4 million in AUM and sees solid trading volume of around 218,000 shares a day. It charges 43 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: ETF Winners Despite Slowing U.S. Inflation in September).

XTN

This fund tracks the S&P Transportation Select Industry Index, holding 43 stocks in its basket. The in-focus firms account for over 2% share each. Further, about 31.6% of the portfolio is dominated by trucking, while airlines, and air freight & logistics take around one-fourth share each. With AUM of $185.4 million, the fund charges 35 bps in fees per year from investors and trades in a lower volume of around 27,000 shares a day. It has a Zacks ETF Rank #3 with a High risk outlook.

FTXR

This fund offers exposure to the 30 most-liquid U.S. transportation securities based on volatility, value and growth by tracking the Nasdaq US Smart Transportation Index. The in-focus eight firms account for a combined 52.4% share. Railroads & trucking, and airlines take the top two spots with one-third share each, while airfreight & logistics round off the next spot with double-digit exposure. FTXR has accumulated $2.4million in its asset base and charges 60 bps in annual fees. Average trading volume is a meager 1,000 shares. FTXR has a Zacks ETF Rank #4 (Sell).

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