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Transport ETFs in Focus as FedEx Disappoints

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After the closing bell yesterday, transport bellwether FedEx (FDX - Free Report) reported robust fiscal second-quarter 2019 earnings. The courier company missed the Zacks Consensus Estimate on the top line and cut its earnings guidance for fiscal 2019.

Earnings per share came in at $4.03, missing the Zacks Consensus Estimate by a couple of cents but up from the year-ago earnings of $3.18. Revenues rose 9.2% year over year to $17.82 billion and edged past the estimate of $17.71 billion.

FedEx slashed its full 2019 earnings per share guidance to $15.50-$16.60 from $17.20-$17.80, much lower than the current Zacks Consensus Estimate of $17.32. Management stated that global trade has slowed in recent months and leading indicators point to further deceleration in the near term. These trends coupled with the change in service mix at FedEx Express are negatively impacting the segment's financial results (read: 3 Sector ETFs to Bet On Despite Soft November Jobs Data).

While the U.S. economy remains solid, international business weakened during the quarter, especially in Europe. To compensate for weakness in its international segment, FedEx announced plans to cut costs. It will implement a voluntary buyout program, limit hiring, reduce international network capacity at FedEx Express and reduce discretionary spending. The buyouts are expected to cost $450-$575 million and "should predominantly occur in the fourth quarter of fiscal 2019," FedEx said. Savings from the program are expected to be between $225 million and $275 million in fiscal 2020.

Following the weak results, FDX shares dropped more than 6% in aftermarket hours. FedEx carries a Rank #3 (Hold) and has a VGM Score of C. It currently falls under a bottom-ranked Zacks industry (bottom 17%), suggesting that more pain might be in store (see: all the Industrials ETFs here).

ETFs in Focus

The disappointing FedEx report is expected to hurt transport ETFs- iShares Dow Jones Transportation Average Fund (IYT - Free Report) , SPDR S&P Transportation ETF (XTN - Free Report) and First Trust Nasdaq Transportation ETF (FTXR - Free Report) . IYT and XTN have a Zacks ETF Rank #3 (Hold) while FTXR has a Zacks ETF Rank #4 (Sell).

IYT

The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to a small basket of 20 securities. Of these, FedEx occupies the top position in the basket with 11.8% of the assets. Within the transportation sector, railroads, and air freight and logistics take the top two spots with 28.3% share each in the basket while airlines (19.5%) and trucking (16.9%) round off the next two. The fund has accumulated nearly $567 million in AUM while it sees a good trading volume of around 233,000 shares a day. It charges 43 bps in fees per year.

XTN

This fund follows the S&P Transportation Select Industry Index and uses almost an equal weight methodology for each security. Holding 43 stocks with AUM of $161.9 million, FedEx accounts for 2.3% share in the basket. The product is heavily exposed to trucking, which accounts for one-third of the portfolio while airlines and air freight & logistics also make up for 27.3% and 20.9%, share, respectively. The fund charges 35 bps in fees per year from investors and trades in a light volume of about 30,000 shares a day (read: Transport ETFs & Stocks to Surge on Busy Thanksgiving Travel).

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 takes 3.8% share in the basket. FTXR has accumulated $2.2 million in its asset base and charges 60 bps in annual fees. Average trading volume is meager at 1,000 shares.

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