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Will UPS Results Halt Transport ETFs' Run?

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Transportation was one of the best performing sectors of 2013 and this trend continues in 2014. This is largely thanks to solid U.S. economic recovery and improving investor sentiment.
Generally, transportation companies get busier when economic activity picks up, which in turn results in strong demand for movement of goods across many economic sectors.
However, the space was hit by severe cold weather that restricted the movement of people and goods by road, air or ship throughout the country. This pushed down the stocks for many companies (read: Beat the Cold Weather with These Hot Sector ETFs).
Further, the recent profit warning and sluggish outlook from the bellwether United Parcel Service (UPS - Free Report) has dampened investor mood making them cautious on the stock and the broad sector. 
UPS Warns of 4Q Earnings
The world's largest package delivery company said that the shorter holiday season, Christmas delivery delays as well as unusually harsh winter took a toll on the earnings for the fourth quarter and full-year 2013. The company now projects earnings for Q4 to come in at $1.25 per share, well below the Zacks Consensus Estimate of $1.42.
United Parcel also slashed its full-year guidance to $4.57 per share, significantly below current street estimates that peg the firm’s 2013 earnings at 4.65–$4.85 a share and the Zacks Consensus Estimate of $4.75 (read: Buy these ETFs to Profit from the Earnings Season).
Though UPS had employed 85,000 temporary workers, it could not deliver many packages in time for Christmas.
Weak 2014 Guidance
Further, the company expects 2014 earnings to grow 10–15% in 2014 to around $5.02–$5.26 per share thanks to the online shopping trend. But this is below the Zacks Consensus Estimate of $5.40 per share.
Though the industrial sector is booming, the news has spread bearishness not only on this package delivery giant but also on the space (see: all the Industrials ETFs here).
Stock Impact
As expected, UPS shares fell sharply as much as 4% in early trading on Friday after this bearish announcement before recovering. The stock was down nearly 0.6% at the close. The volume levels were also notable with three times more shares trading hands than the normal trading days.
The sluggish news were also negatively impacted the other parcel delivery giant FedEx (FDX) that fell about 1% on the day.
ETF Impact
Surprisingly, this wasn’t that bad for the transportation sector ETFs world. Currently, there are two ways to play the space with ETFs – iShares Dow Jones Transportation Average Fund (IYT - Free Report) and SPDR S&P Transportation ETF (XTN - Free Report) . Both of these were down nearly 0.8% in the early trading on Friday but recovered slightly to down 0.4% at the close.
This is because the two ETFs were also carried by other components in their holdings, namely railroads, airline and low cost trucking firms. These types of companies were not heavily impacted by the bearish tone from UPS (read: How Will the Shipping ETF Sail in 2014?).
In fact, IYT puts about 29% in railroads while delivery service makes up for nearly 20% share. Meanwhile, XTN is heavily exposed to trucking and airlines as these make up roughly 61% of the total while air freight & logistics accounts for 20% share. While IYT is more popular and liquid between the two choices, XTN is cheap by 10 bps. 

Bottom Line
Both XTN and IYT are well diversified across various segments, suggesting that the space can easily counter shocks from some of the industry’s biggest components. As such, investors shouldn’t completely write off transportation ETFs from their holdings based on UPS’ sluggish outlook (read: 3 Top Ranked ETFs That Will Crush the Market in 2014).
Moreover, the duo has a Zacks Rank of 2 or ‘Buy’ rating, indicating that these could outperform the broad markets in the coming months.
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