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Will FedEx’s Q4 Spell More Trouble For Transport ETFs?

The transportation sector has given an ugly performance this year in spite of a strengthening economy, better job conditions and cheap fuel. The major culprit is the strong dollar, which is eroding the profitability of big transporters. The rough trading is expected to continue for the sector in the months ahead, especially after a disappointing fourth quarter 2015 earnings report from bellwether FedEx (NYSE: FDX ). The courier company lagged our estimates on revenues and earnings and guided lower, dampening investors’ mood. However, the numbers were better than the year-ago quarters. Q4 FedEx Results in Detail Earnings per share climbed 4.7% year over year to $2.66 but missed the Zacks Consensus Estimate by four cents. Revenues rose 2.5% year over year to $12.1 billion but fell shy of our estimate of $12.39 billion owing to negative currency translation and lower fuel surcharges. FedEx’s ongoing three-year cost cutting measures in the FedEx Express unit, which started in late 2012, are largely paying off and are expected to continue doing so in the coming quarters. This profit-improvement plan will continue to boost revenue and profitability. However, a strong dollar and lower fuel surcharges will likely keep on hurting the company’s profitability in fiscal 2016. As a result, the second largest U.S. package delivery company provided fiscal 2016 earnings per share guidance of $10.60-$11.10, the midpoint of which is below the Zacks Consensus Estimate of $10.90. Investors should note that FedEx is in the process of acquiring the Dutch parcel-delivery company TNT Express ( OTCPK:TNTEY ) for €4.4 billion ($4.8 billion). The buyout is expected to close in the first half of calendar year 2016. The acquisition, pending European regulatory approvals, would bolster its global footprint, particularly in the European markets with many untapped nations like the UK and France. The deal would create the third-largest delivery company in Europe after United Parcel Service (NYSE: UPS ) and Deutsche Post ( OTCPK:DPSGY ). Hence, the transaction will give a big boost to the company’s competitive position and future growth story. That being said, FedEX has a solid Growth Style Score of ‘A’ with some flavor of value as it also has a Value Style Score of ‘B’. Further, the stock has a favorable Zacks Rank #3 (Hold) and a solid industry Rank in the top 43% at the time of writing. Market Impact FDX shares dropped as much as 3.3% in yesterday’s trading session following disappointing results on elevated volumes of nearly 2.5 times than the average. This represents the biggest one-day fall so far this year. Given this, many investors may want to tap the beaten down price of FDX by considering either of the following ETFs: iShares Transportation Average ETF (NYSEARCA: IYT ) The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to the small basket of 20 securities. Out of these, FedEx occupies the top position in the basket with 13.5% of assets. Within the transportation sector, railroad takes the top spot with 46.8% share in the basket while air freight and logistics (30.1%), and airlines (15.2%) round off the top three. The fund has accumulated nearly $870 million in AUM while it sees good trading volume of around 438,000 shares a day. It charges 43 bps in fees per year from investors and lost 0.3% on the day following the earnings results. The product is down 8.3% in the year-to-date time frame and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook. SPDR S&P Transportation ETF (NYSEARCA: XTN ) This fund follows the S&P Transportation Select Industry Index and uses almost an equal weight methodology for each security. Holding 50 stocks with AUM of $399.2 million, FedEx takes the fourth spot with a 2.7% share in the basket. The product is heavily exposed to trucking which accounts for 36.2% of total assets while airlines make up for another one-fourth share. Airfreight & logistics, and railroads account for 22.7% and 11% share, respectively. The fund charges 35 bps in fees per year from investors and trades in a moderate volume of about 83,000 shares a day. XTN was down 0.6% at the close after FedEx earnings were released and 8.5% so far in the year. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a High risk outlook. Original Post

Finally A New Airline ETF Prepares To Take Off

The U.S. aviation industry has been on cloud nine since the oil price succumbed to gravity. Moreover, a pickup in the domestic economy, rising cargo demand, a boost to tourism and the subsiding Ebola scare put the industry in the top-performing category. The sentiment around the sector was so bullish that Airlines rocketed to the highest level since 2001 in late December, per Bloomberg . Investors should note that the ETF industry was largely unable to reap the return out of this booming industry as Guggenheim closed the last airline ETF Guggenheim Arca Airline ETF (NYSEARCA: FAA ) in 2013. Prior to that, Direxion Airline Shares ETF (NYSE: FLYX ) had also faced the same fate in 2011. However, to fill the void, a new airline ETF has been filed lately. The fund looks to trade under the name of U.S. Global Jets ETF (JETS) . The Proposed Fund in Detail The passively managed product intends to track the U.S. global Jets Index that considers worldwide airline companies, per the prospectus. The index attaches weight to the companies on the basis of the square root of their average daily volume seen in the trailing three months. The index looks to consider 25 to 40 airline stocks across the market. The product will charge 60 bps in fees. How Does it Fit in a Portfolio? The global aviation industry holds a steady outlook for 2015. The outlook is especially positive for the U.S. economy, with GDP growth gaining momentum. Consolidation benefits, growing travel demand and enhanced ancillary revenues also provide an impetus for growth. Other regions including the Middle East, Latin America & Africa and Asia-Pacific also hold promise. Several Gulf-based airlines continue to build up their positions within the global airline industry. Fleet development should improve over the coming years. Apart from the high demand from the oil rich Gulf nations, a major part of the fleet demand will be driven by China and India, and continuous expansion of low budget carriers around the world. If this was not enough, an unexpected plunge in oil prices turned out to be the real catalyst in propelling the industry. Airline profit outlook depends on fuel prices, the major variable component in the industry. The oil price drop of about 50% seen in 2014 is yet to turn around in 2015. In such a bullish backdrop, the upcoming airline ETF has every reason to be successful, if it gets approval. ETF Competition The road ahead for the proposed ETF is nothing but clear skies. The industry has long been waiting for such a product after the shutdown of the Guggenheim fund. While there are no direct competitors to the product, investors should note that two transportation ETFs, namely the iShares Transportation Average ETF (NYSEARCA: IYT ) and the SPDR S&P Transportation ETF (NYSEARCA: XTN ) have weight in the airlines industry. While IYT puts about 45% of its weight in the airlines, air freight & logistics sectors, XTN places about one-fourth of the fund in them. We expect the newly filed product to cash in on the underlying sector’s allure and find a solid following among investors. Nonetheless, the two transportation ETFs could eat into the proposed fund’s asset base because of the formers’ diversified approach to the transportation sector. Still, investors solely eyeing the global aviation industry would be satisfied by the proposed JETS ETF.