In spite of a strengthening economy, better job conditions, and cheap fuel, the transport sector was held back this year due to a strong dollar, which is eroding the profitability of big transporters (read: Is Cheap Oil Driving Transport Earnings and ETFs?).

The shady outlook seems to be continuing with the latest third-quarter 2015 earnings report from bellwether FedEx (FDX - Analyst Report). Though the courier company strongly beat our earnings estimate, revenues missed the same and a weak guidance dampened investors’ mood.

FedEx Results in Detail

The company reported the strongest profit growth in three years. Earnings per share jumped 63% from the year-ago earnings to $2.01, easily outpacing the Zacks Consensus Estimate of $1.88. Revenues rose 4% year over year to $11.72 billion but fell shy of our estimate of $11.85 billion owing to negative currency translation. All the three business segments contributed to revenues and profitability growth.

FedEx’s ongoing three-year cost cutting measures in the FedEx Express unit, which started in late 2012, is largely paying off and expected to continue doing so in the coming quarters. This profit-improvement plan will continue to boost revenue and profitability, solidifying the company’s future growth story.

However, the second largest U.S. package delivery company expects a strong dollar and higher employee bonuses to hurt profitability in the fourth quarter. As such, FedEx narrowed its fiscal 2015 earnings per share guidance to $8.80–$8.95 from $8.50–$9.00. The midpoint is well below the Zacks Consensus Estimate of $8.97.

Market Impact

Given the mixed sentiments, FDX shares dropped as much as 3% in yesterday’s trading on elevated volume but recovered at the close with a just 1.4% decline. However, this rough trading is unlikely to continue for long as the stock has a top Zacks Rank #2 (Buy) and a solid industry rank in the top 44% at the time of writing.

In such a backdrop, investors could take advantage of the current beaten down stock price by considering any of the following ETFs (read: West Port Congestion to Hurt These ETFs).

iShares Dow Jones Transportation Average Fund (IYT - ETF report)
 

The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to the small basket of 20 securities. Out of these, FedEx occupies the top position in the basket with 11.94% of assets. Within the transportation sector, railroad takes the top spot with 47.8% share in the basket while air freight and logistics (27.8%) and airlines (16.8%) round off the top three.

The fund has accumulated nearly $1.6 billion in AUM while sees good trading volume of around 521,000 shares a day. It charges 43 bps in fees per year from investors and added 0.3% the day following the earnings results. The product is down 0.4% in the year-to-date timeframe and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook (see: all the Industrials ETFs here).  

SPDR S&P Transportation ETF (XTN - ETF report)

This fund follows the S&P Transportation Select Industry Index (SPSITN) and uses almost an equal weight methodology for each security. Holding 50 stocks with AUM of $658.5 million, FedEx makes up for 2.3% share in the basket but does not belong to the top 10 holdings. The product is heavily exposed to trucking which accounts for 35% of total assets while airlines make up for another one-fourth share. Airfreight & logistics, and railroads account for 21.6% and 12.3% share, respectively.

The fund charges 35 bps in fees per year from investors and trades in a moderate volume of about 88,000 shares a day. XTN added 0.5% at the close after FedEx earnings and 1.6% so far in the year. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a High risk outlook.