Transport ETFs In Focus on FedEx Corporation (FDX) Earnings Beat

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September 20, 2013 3:59pm NYSE:IYT NYSE:XTN

transport fedex upsThe transport sector is one of the best performers in the market this year thanks to a reviving U.S. economy on improving retail, manufacturing and labor data. The positive trends in the economy suggest growing demand for movement

of goods across many economic sectors.

Investors should note that transport is often considered a barometer of broad economic health as it grows when U.S. economic activity picks up. Further, the sector has a direct correlation with the retail and manufacturing numbers (read: Guide to Transportation ETF Investing).

The optimism in the sector was further confirmed by the latest earnings report from bellwether FedEx Corporation (NYSE:FDX).

FedEx Results in Focus

The courier company posted solid first quarter fiscal 2014 (ended August 31) results on growing customer demand across all segments.

Earnings per share of $1.53, not only surpassed the Zacks Consensus Estimate by 4 cents, but also increased from the year-ago earnings of $1.45. Revenues grew 2% year over year to $11 billion.

While FedEx continues to be impacted by sluggish global economic growth, it remains focused on cost cutting measures in its FedEx Express unit. The FedEx Ground segment generated strong profitability in the quarter.

Further, the company maintained its full-year earnings growth guidance in the range of 7–13%. FedEx would likely raise its shipping rates by an average of 3.9% at its domestic express shipping business early next year. Additionally, pricing rise for the ground and SmartPost business will be implemented later this year. The series of price hike suggests a bullish outlook for the company and the overall transport space.

Market Impact

Following the earnings beat, shares of FDX hit a new 52-week high of $116.95 and climbed 5% at the close on elevated volume of roughly three times a normal day.

This solid run was also felt in the ETF world, with transportation ETFs surging. Currently, there are two ways to play the space with ETFs and both gained in the day’s session (see: all the Industrials ETFs here).

iShares Dow Jones Transportation Average Fund (IYT)

This ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to the small basket of 21 securities. The fund has accumulated $644.4 million in AUM while sees good volume of trading. It charges 46 bps in fees and expense.

FedEx occupies the third position in the basket with 8.02% of assets. The product is tilted towards the railroad at 30% while delivery service sector makes up for nearly 20% share.

IYT gained 1.51% on the day and has a Zacks ETF Rank of 1 or ‘Strong Hold’ with a ‘Medium’ risk outlook. This suggests that the ETF would outperform over the next one year.

SPDR S&P Transportation ETF (XTN)

This ETF follows the S&P Transportation Select Industry Index and has managed an asset base of $46.5 million. The fund charges 35 bps in fees per year from investors and trades in a light volume of just 12,000 share a day.

In total, the fund holds about 43 securities in its basket. Of these firms, FDX takes the fourth spot, making up 13.17% of the assets. The product is heavily exposed to trucking and airlines as these make up roughly 60% of the total while air freight & logistics accounts for 19% share.

The fund added 0.91% on the day and currently has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘High’ risk outlook.

Bottom Line

In fact, both ETFs have been on a tear, beating out broad markets in the year-to-date period. iShares and State Street products returned 27.24% and 34.01%, respectively, compared with the gain of 21.52% for SPDR S&P 500 (SPY) (read: Transport ETFs: Can the Surge Continue?).

The stellar performance by FDX signals that the transport space would continue to surge given the improving U.S. economy and increasing investor confidence.

This article is brought to you courtesy of Eric Dutram.

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