Even with oil prices sliding, the iShares Transportation Average ETF (NYSEArca: IYT), the tracking exchange traded fund for the Dow Jones Transportation Average, and rival transportation ETFs have been tumbling in recent weeks and that could be a bad sign for the broader market.
So far this year, the railway industry has been weakening on lower rail traffic after the drop in energy prices, notably from oil and coal companies. Over the first 35 weeks of the year, U.S. railroads experienced cumulative volume that was down more than 4% year-over-year. However, the pressures may have already been priced in, and the industry has a number of factors that will help support further growth.
Many railroad companies have become more efficient, cutting costs wherever they can, which should help bolster their bottom line ahead. Additionally, market observers are optimistic about a cyclical recovery where U.S. consumers and businesses spend more, which would add to increased activity through railways and transportation sectors. Railroads are popular plays among some of the largest investors, including Bill Gates and Warren Buffett. [Sector ETF to Play Warren Buffett, Bill Gates’ Pick]
From a technical perspective, transportation stocks are not in good health.
“A lower low and lower high is the basic definition of a bearish trend. And combined with the October 2014 selloff we can see a possible head-and-shoulders pattern nearing completion. The neckline, or support, for the pattern would be in the 7350 area, somewhat below the August low. The index closed at 7627 Wednesday,” reports Michael Kahn for Barron’s.
Airlines are perhaps the brightest spot within the transportation industry at the moment. Falling crude oil prices have supported airline stocks and the U.S. Global Jets ETF (NYSEArca: JETS), the only dedicated airline industry-related ETF on the market. [Oil ETFs Plunge to All-Time Lows]
“To be sure, different groups within the transportation sector reacted differently. Airlines, for example, did not break down, and even set a nine-month high earlier this week. Lower fuel costs did indeed help their performance,” according to Barron’s.
Airlines are also paying down debt while free cash flow is rising. Debt as a percentage of operating revenues has declined to 41.4% in 2014 from over 65% in 2010. Free cash flow is expected to rise over $15 billion this year from close to zero over the past couple of years.
The industry is also enjoying greater ancillary revenue, or revenue from sources outside of passenger tickets, such as baggages, food, beverage, rentals and wifi, among others. Global ancillary revenue has increased to $31.5 billion in 2013, compared to $2.45 billion in 2007. [Airline ETF Looks Good]
iShares Transportation Average ETF
