As the economy continues to weaken, highly cyclical stocks have been getting hammered more than most, leading the market lower over the past month. One of the most troubled in this time period has undoubtedly been the transport sector as that particular corner of the market has lost close to 1,000 basis points more than the overall market in the past three months. Yet, while stock prices have slumped, earnings have held up surprisingly well at a number of firms in the sector, namely those in the railroad segment of the broad transportation industry, suggesting that fears, and not fundamentals are causing the recent slump. With that being said, today’s key earnings report from Federal Express could be a market moving event that either shows more earnings strength in the sector, or confirms investors’ worst fears over this highly sensitive and important market sector.
The Memphis-based package delivery giant is expected to post earnings before the bell today, setting the tone for a number of smaller firms, and indeed the broad transport sector, with its quarterly report. The company is expected to post earnings of about $1.48 a share according to consensus estimates, a figure that is both below the company’s May and year ago figures. With that being said, the company did beat estimates in the previous quarter and estimates have been broadly rising in the past quarter, suggesting that some analysts are becoming more optimistic about the short-term outlook of the company [ETF Plays On Planes, Trains, And Automobiles].
However, investors should note that the firm has missed earnings in three of its last four reports, including a roughly 11% miss in the November 2010 report. This history of misses along with a gloomy outlook from rival UPS, has led some analysts to trim their expectations back for the company heading into the key fourth quarter. In fact, some analysts believe the company may cut its guidance for the fiscal year, potentially driving down the price of the stock further. Either way, investors could be in for some surprises at today’s data release, suggesting that it could be a very important session for the company’s stock as well as the broad transport industry [see ETF Plays To Invest Like Buffett, Fisher, Paulson].
Thanks to this key earnings report, investors should look for the Dow Jones Transportation Average Index Fund (IYT) to remain in focus throughout today’s trading session. Federal Express makes up close to 9.8% of total assets in the fund, enough to make the company the second biggest holding, trailing only Union Pacific. Since there are only 21 securities in the product and close to one-tenth of the total assets are in FedEx, the earnings report could have an outsized impact on this popular fund [see holdings of IYT here].
IYT could certainly use a boost from the package delivery firm as shares of the iShares product have slumped by 15.2% in the past quarter and 11.5% in year-to-date terms. Should FedEx manage to post solid earnings in light of the weak economy and give good guidance for the rest of the calendar year, it could help to send IYT sharply higher on the day. If, however, FDX gives in to market expectations and calls for a gloomy end of the year and slower Asian growth, it could hurt IYT and continue the fund’s recent stretch of weakness into the fourth quarter of the year [see more charts of IYT here].
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Disclosure: No positions at time of writing.