Cyberattack, Harvey Hit FedEX Earnings: ETFs To Watch

After the closing bell yesterday, the transport bellwether FedEx (NYSE:FDX) reported weak fiscal 2018 first-quarter earnings results. The courier company missed the Zacks Consensus Estimate on both the top and bottom lines and provided bleak earnings guidance. A cyberattack and Hurricane Harvey took a toll on the company’s business (read: Hurricane Harvey Puts These ETF Areas in Focus).

Earnings per share came in at $2.51, far below the Zacks Consensus Estimate of $3.17 and down from the year-ago earnings of $2.82. Revenues rose 4.1% year over year to $15.30 billion but fell shy of our estimate of $15.37 billion.

A cyberattack on Jun 29 crippled the company’s Ukraine business, TNT Express, and slashed 79 cents per share from its profits while Hurricane Harvey, which wreaked havoc in southeastern Texas in late August, wiped out 2 cents per share. The headwinds compelled the company to reduce its fiscal 2018 earnings per share guidance from $13.20-$14.00 to $12.00-$12.80. The midpoint is well below the Zacks Consensus Estimate of $13.63 (read: Petya Malice Spilling Over: Buy Cybersecurity Stocks & ETFs).

However, the second-largest U.S. package delivery company is confident of the long-term growth prospect and reaffirmed its commitment to improve operating income at the FedEx Express segment by $1.2-$1.5 billion in fiscal 2020 versus fiscal 2017.

Following the results, FDX shares plunged as much as 4% in aftermarket hours on elevated volume. Currently, FedEx has a Rank #4 (Sell) and a dismal Industry Rank in the bottom 18%, suggesting some rough trading at least in the near term. However, the stock has strengthening fundamentals with a solid Value, Growth and Momentum Style score of B, A and A, respectively.

ETFs in Focus

The disappointing FedEx report is expected to hurt transport ETFs – iShares Dow Jones Transportation Average Fund IYT,SPDR S&P Transportation (NYSE:XTN) ETF XTN and First Trust Nasdaq Transportation ETF FTXR. All these funds have an unfavorable Zacks ETF Rank #4 (Sell) (see: all the Industrials ETFs here).

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 13.7% of the assets. Within the transportation sector, air freight and logistics takes the top spot with 29.9% share in the basket while railroads (25.7%), trucking (19.2%) and airlines (19.1%) round off the next three. The fund has accumulated nearly $849.5 million in AUM while it sees a good trading volume of around 315,000 shares a day. It charges 44 bps in fees per year from investors and has gained 6% in the year-to-date time frame.

XTN

This fund follows the S&P Transportation Select Industry Index and uses almost an equal weight methodology for each security. Holding 45 stocks with AUM of $178.5 million, FedEx accounts for 2.7% share in the basket. The product is heavily exposed to trucking, which accounts for 31.5% of total assets while airlines and air freight & logistics also make up for 26.3% and 22%, share, respectively. The fund charges 35 bps in fees per year from investors and trades in a light volume of about 29,000 shares a day. XTN is up 7.1% so far in the year (read: Hurricane Irma: ETF Winners & Losers).

FTXR

This fund offers exposure to the 30 most-liquid U.S. transportation securities based on volatility, value and growth by tracking the Nasdaq US Smart Transportation Index. FedEx occupies the fifth position in the basket with 7.7% share. FTXR has accumulated $3.5 million in its asset base and charges 60 bps in annual fees. Average trading volume is meager at 1,000 shares. The ETF has added 4.6% in the year-to-date time frame.

Our View

Despite weak FedEx results and a sluggish outlook, investors shouldn’t completely write off transportation ETFs from their holdings. This is because these funds have spread out exposure to a number of firms in various types of industries like railroads, airlines and low-cost trucking suggesting that the space can easily counter shocks from some of the industry’s biggest components.

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ISHARS-TRAN AVG (IYT): ETF Research Reports

SPDR-SP TRANSPT (XTN): ETF Research Reports

FedEx Corporation (FDX): Free Stock Analysis Report

FT-NDQ TRANSPRT (FTXR): ETF Research Reports

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