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.

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 - Free Report) 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 - Free Report) , Kansas City Southern (KSU - Free Report) and Norfolk Southern Corp (NSC - Free Report) 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 - Free Report) , 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 - Free Report) and United Continental (UAL - Free Report) 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.

Last but not the least, earnings for the leading trucking carrier J.B. Hunt (JBHT - Free Report) 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 - Free Report) and SPDR S&P Transportation ETF (XTN - Free Report) , 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.

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.

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