The Dow Jones Transportation Average (DJTA), which is a price weighted index of 20 transportation stocks made up of airlines such as Delta Airlines (NYSE:DAL), railways like Norfolk Southern (NYSE:NSC) and trucking and delivery companies such as FedEx (NYSE:FDX), is up nearly 8% for the year, while the S&P 500 has remained fairly flat. When the historical performance is observed, the transportation index is up 65% in the last 10 years, while the S&P 500 has declined by 24%.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

FedEx Earnings Release

In its first-quarter earnings release, package delivery giant, FedEx saw net income increase by 110% from $181 million to $380 million on revenues increases of only 18%. Similar to many other corporations who were forced to cut cost while maintaining operation, FedEx used resources more efficiently than in previous years. Operating income increased drastically in the Express and Ground segments, while decreasing by 8% in the FedEx Freight business, resulting in a total increase of 99%.

Despite the year-over-year increases, the market did not reward FedEx as shares fell nearly 4.5% after the announcement. Although positive signals have been appearing in terms of holiday shipment volumes, management noted that they predict slower economic growth moving forward. As a result, approximately 5% of the workforce is expected to be cut from the payroll.

Expectations

FedEx, the second largest player in the air delivery and freight service industry, provided weak earnings guidance due to an expected increase in fuel, maintenance and repair costs in the second quarter. However, more indicators regarding the health of the overall industry will emerge when United Parcel Services (NYSE:UPS) and C.H. Robinson Worldwide (Nasdaq:CHRW) release their quarterly earnings performance results in late October. UPS and CHRW are the largest the third largest firms in the industry respectively.

Small Cap Delivery

While FedEx, UPS, and C.H. Robinson are incorporated in the Dow Jones Transportation Average, other lesser known firms are also key players in the air delivery & freight service sector and are subject to the similar economic conditions as the large caps.

Air Transport Service Group (Nasdaq:ATSG) has undergone massive cost cutting operations to maintain its level of profitability. On a year-over-year basis, earnings per share increased from $0.13 to $0.15 on a revenue decrease of 14%. EPS figures were higher because the salaries, benefits and wages expense fell by nearly 55% as a result of job cuts and overall downsizing. Head count declined by 24%. Although, the firm's financial results are mixed, Air Transport Service Group has doubled in price through 2010, largely thanks a long term aircraft and operating agreement with DHL.

The Bottom Line

The air delivery and freight service industry, like other areas within the transportation service sector, are forced to adopt a new business model by which they have to do more with fewer resources. While such measures are harmful to the overall economy, they improve the long-term efficiency of the business. As FedEx CEO said, the focus should not be on the short range, but on the momentum going into 2012 as the "headwinds from 2011 will be gone." (For more stock analysis, check out Facebook Surpasses Google.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!