Transport ETFs Gain Momentum After A Mixed Q4

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Includes: IYT, XTN
by: Zacks Funds

Though the transportation sector is leading the overall S&P 500 earnings growth halfway through the Q4 earnings season, the rate of growth is uninspiring and beat ratios are predominantly weak.

This is especially true as total earnings from 97.7% of the sector's total market capitalization reported so far are up 14.5%, while revenues are down 2.2%. This is worse than Q3 earnings growth of 22.5% and revenue decline of 1.3% for the same period. About 53.8% of the companies have beaten earnings estimates, and 7.7% have surpassed revenues, compared to earnings and revenue beat ratios of 84.6% and 30.8%, respectively, for Q3.

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), beat our earnings estimate by 16 cents, but revenues of $16.1 billion fell shy of our estimate of $16.3 billion. For the current fiscal 2016, the company expects earnings per share in the range of $5.70-5.90, which represents 5-9% growth year over year. The Zacks Consensus Estimate at the time of earnings release was pegged at $5.77.

Union Pacific (NYSE:UNP), the U.S. largest railroad, reported earnings of $1.31 per share, missing the Zacks Consensus Estimate by 12 cents, and revenues of $5.21 billion fell short of our estimate of $5.34 billion. Other major railroads like CSX Corp. (NYSE:CSX) and Kansas City Southern (NYSE:KSU) beat on earnings, but missed on revenues. Both companies outpaced our earnings estimate by 2 cents and 13 cents, respectively. At CSX, revenues lagged the Zacks Consensus Estimate by $135 million, while at KSU, revenues missed by $11 million.

Ryder Systems (NYSE:R), the leader in supply chain management and fleet management services, lagged on both the top and bottom lines. Earnings per share of $1.66 came below the Zacks Consensus Estimate of $1.75, while revenues of $1.67 billion were slightly below our estimate of $1.69 billion. The two largest U.S. airlines, Delta Air Lines (NYSE:DAL) and United Continental (NYSE:UAL), also missed our earnings estimates by a penny and a nickel, respectively. Revenues were also weak, with Delta missing by $122 million and United Continental lagging by $75 million.

Last but not the least, earnings for the leading trucking carrier, J.B. Hunt (NASDAQ:JBHT), came in above the Zacks Consensus Estimate by a penny, and revenues were just $2 million below our estimate.

ETFs in Focus

Despite mixed results, stocks in the transportation sector have been able to hold up well, gaining an average 0.12% (average price difference between a day before and after the earnings announcement of a stock), per the Zacks Earnings Trend.

As a result, transport ETFs gained strong momentum over the past 10 days. Both the iShares Transportation Average ETF (NYSEARCA:IYT) and the SPDR S&P Transportation ETF (NYSEARCA:XTN) were up 3.1% and 4.8%, respectively, in the same time period. Both funds have a Zacks ETF Rank of 4 or "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 51%, while mid- and small-caps account for 29% and 20% share, respectively, in the basket. The product is heavily concentrated on the top firm - FedEx (NYSE:FDX) - at 12%, followed by UPS (9%), JBHT (6.7%), UNP (6.5%) and KSU (6.3%).

From a sector perspective, air freight & logistics takes the top spot, with 30% of the portfolio, while airlines, railroads and trucking round off to the next three spots with double-digit exposure each. The fund has accumulated nearly $551.9 million in AUM, while it sees solid trading volume of more than 334,000 shares a day. IYT charges 44 bps in annual fees.

XTN

This fund uses an almost equal weight methodology for each security by tracking the S&P Transportation Select Industry Index. Holding 48 stocks in its basket, with AUM of $147.6 million, each security accounts for less than 3.3% of total assets. The ETF is skewed toward small-caps at 54%, while the rest is evenly split between mid- and large-caps.

About one-third of the portfolio is dominated by trucking, while airlines takes another one-fourth share. Airfreight & logistics and railroads also make up for double-digit allocation each. The fund charges 35 bps in fees per year from investors and trades in a moderate volume of nearly 78,000 shares a day.

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