Is Cheap Oil Driving Transport Earnings And ETFs?
Transportation stocks have been the biggest beneficiaries of cheaper oil and an improving U.S. economy. This is easily reflected in their Q4 results as total earnings from 72.8% of the sector’s total market capitalization reported so far are up 20.6% on 5.5% revenue growth. Earnings surprises were impressive with 72.8% of the companies beating earnings estimates with a median surprise of 3.3 and 57.1% beating revenues with a median surprise of 0.4. In particular, earnings from several big players in the space like Union Pacific (NYSE: UNP ), Kansas City Southern (NYSE: KSU ), CSX Corp. (NYSE: CSX ), Delta Air Lines (NYSE: DAL ) and United Continental (NYSE: UAL ) have been encouraging. However, sluggish outlook from the bellwether United Parcel Service (NYSE: UPS ) had severely affected the broad space, erasing most of the stock gains made in the year. Transportation Earnings in Focus Earnings at the world’s largest package delivery company – UPS – were on par with the Zacks Consensus Estimate of $1.25 while revenues of $15.9 billion were marginally ahead of our estimate of $15.8 billion. The company projects earnings per share of $5.05-$5.30 for fiscal 2015, representing 6-12% growth on an annual basis. The mid-point is above the Zacks Consensus Estimate of $5.14. Further, the company reaffirmed its long-term earnings per share growth target of 9-13%. The share price of UPS grew about 0.4% on the day of its earnings release on February 2. The two largest U.S. airlines – DAL and UAL – flew higher after beating the Zacks Consensus Estimate on the earnings front. Both stocks surged 11.4% and 7.7% to touch new 52-week highs of $51.06 and $74.52, respectively, before being hit by UPS’ warnings. DAL is just up 0.4% to date since its earnings release on January 20 and UAL is down 1.8% following its earnings release on January 22. Earnings at Delta beat the Zacks Consensus Estimate by three cents while revenues of $9.65 billion edged past our estimate of $9.59 billion. On the other hand, earnings at United Continental came in at $1.20, outpacing our estimate by six cents, and revenues were $9.3 billion, on par with our estimate. UNP , the U.S. largest railroad, reported earnings of $1.61 per share, 10 cents ahead of the Zacks Consensus Estimate and 27% higher than the year-ago earnings. Revenues climbed 9% year over year to $6.2 billion, ahead of our estimate of $6.1 billion. The stock climbed 6.4% since its earnings announcement on January 22 before the market opened. Other major railroads like CSX and KSU have given mixed performances. While earnings at CSX meets our estimate of 49 cents, revenue of $3.19 billion exceed the Zacks Consensus Estimate of $3.18 billion. On the other hand, KSU earnings outpaced by 4 cents and revenues of $643 million lagged the Zacks Consensus Estimate of $658 million. Shares of CSX gained 3.3% to date post earnings on January 13 after the closing bell and KSU added nearly 1% since its earnings announcement on January 23 before the market opened. ETFs in Focus Given that the cheap fuel will continue to provide a big boost to transport earnings growth, investors should definitely tap the current beaten down prices in the form of ETFs with a lower level of risk. This is especially true as the transport sector actually has the best rank for any industry at the time of writing – about three-fourths of the industries under transport have Zacks Ranks in the top 37%, suggesting bullishness in the sector. iShares Dow Jones Transportation Average Fund (NYSEARCA: IYT ) The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to the small basket of 20 securities. The fund has a certain tilt toward large cap stocks at 49% while mid and small caps account for 31% and 19% share, respectively, in the basket. The product is heavily concentrated on the top five holdings, accounting for 42.8% of assets. From a sector perspective, railroad takes the top spot with less than half share in the basket, while air freight & logistics and airlines round off to the top three with double-digit exposure each. The fund has accumulated nearly $2 billion in AUM while sees good trading volume of around 490,000 shares a day. It charges 43 bps in annual fees and has lost 2.6% so far in the year. SPDR S&P Transportation ETF (NYSEARCA: XTN ) This fund uses the equal weight methodology to each security by tracking the S&P Transportation Select Industry Index. Holding 50 stocks in its basket with AUM of $623.4 million, each security accounts for less than 3.3% of total assets. The ETF is skewed toward small caps at 51% while mid and large caps account for 27% and 22% share, respectively. About one-third of the portfolio is dominated by trucking while airlines take another one-fourth share. Airfreight & logistics, and railroads also make up for a double-digit allocation. The fund charges 35 bps in fees per year from investors and trades in a moderate volume of more than 82,000 shares a day. XTN is down about 5.8% in the year-to-date timeframe. Bottom Line Investors should keep in mind that cheap fuel is currently a huge boon to the transportation sector. Better job conditions and an improving economy are also driving the growth in the sector. As a result, investors shouldn’t miss this opportunity to stuff these funds into their portfolio. Further, these funds could easily counter shocks from some of the industry’s biggest components like the recent UPS warnings.