What Is The Impact On Transport ETFs As United Parcel Service, Inc. (UPS) Guides Lower

transport fedex upsAs is usually the case in the early stages of most market rallies, transportation stocks were leading the way higher for much of 2013. The space saw a great first quarter, though it consolidated in the second quarter thanks to emerging market weakness, and concerns from the Federal Reserve regarding easy money policies.

However, the space has rebounded nicely from the Fed-induced panic in July, racing back towards fresh highs. Yet while optimism is certainly present in the space, it may not last if the recent earnings report from bellwether United Parcel Service (NYSE:UPS) is any guide.

UPS Warning

The company recently said that it is now expecting earnings for Q2 to come in at $1.13/share, this is below the current Zacks Consensus of $1.19/share, and is actually below the year ago figure as well. The company also slashed full year guidance to a range of $4.65-$4.85 a share, a far cry from current estimates that peg the firm’s 2013 earnings at $4.97/share (see 3 Top Ranked Sector ETFs for Earnings Season).

Beyond that, the important company also said that it believes that customers will use cheaper options, possibly pushing away from some of their higher margin options in the future. UPS also stated that they are seeing a bit of a slowdown in the U.S. industrial sector, which could be more bearish news for the not only the firm, but the space in general as well.

Stock Impact

As you might expect, UPS shares were under pressure after this bearish announcement, with shares falling by about 5.3% in the early part of trading. The volume levels were also of note, with more shares trading hands in the first hour than in most normal trading days.

Other companies in the space were also negatively impacted by the report, with arch-rival FedEx (NYSE:FDX) experiencing above average volume and falling by about 2% as well. Meanwhile, firms like CH Robinson Worldwide (CHRW) and Expeditors International (EXPD) also struggled, but their losses were pretty mild compared to both UPS and FDX (See 3 Sector ETFs to Profit from Rising Rates).

ETF Impact

Surprisingly, this wasn’t that bad of news for the transportation sector ETFs. Currently, there are two ways to play the space with ETFs, the iShares Dow Jones Transportation Average Fund (NYSEARCA:IYT) and the SPDR S&P Transportation ETF (NYSEARCA:XTN) and both of these were down just 0.2% in early Friday trading, despite the duo having both UPS and FDX in their top ten holdings.

The two ETFs were thus carried by other components in their holdings, namely railroads and low cost trucking firms. These types of companies were not as heavily impacted by the bearish tone from UPS, and if anything, may have actually benefited from the guidance reduction.

That is because the UPS report suggested that service users would be cycling towards slower, lower margin shipping services for their products. This hurts companies like UPS and FDX for their air freight, but it was welcomed news for those in the relatively slow rail market.

As a result, companies like UNP, KSU, CSX, and NSC were all up on the day, with several firms rising more than 1% on the day. Additionally, both IYT and XTN each have sizable airline and marine components, and these were pretty much unaffected by the UPS news due to their very different industry focuses.

In fact, XTN puts just about 20% in companies classified as ‘air freight & logistics’ with about 36% in trucking. Meanwhile, IYT has roughly 20% in the delivery service industry, instead putting roughly 31% into the railroad space (see 3 Excellent Dividend ETFs for Safety and Income).

Bottom Line

The allocation profile of both XTN and IYT likely saved the two funds from more severe losses on the day. UPS and its rival FDX faced severe weakness, but the reasons for their slumps were not really pertinent to other firms in the transportation sector.

Given this, you probably shouldn’t write off transportation ETFs just yet, as the space is clearly well-diversified and can fight through shocks from some of the industry’s biggest components. Make sure to watch for railroad and airline earnings later this season though, as weakness here might doom the resilient space, especially after the bearish news from UPS regarding their outlook for the rest of 2013.

This article is brought to you courtesy of Eric Dutram.

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