ETF Overview

iShares Transportation Average ETF (IYT) owns a portfolio of U.S. transportation stocks. The fund seeks to track the investment results of the Dow Jones Transportation Average Index. IYT’s portfolio of stocks include delivery services companies, railroad companies, truckers, airlines, and marine transport companies. These stocks are trading at a discount to the S&P 500 Index and are currently fairly valued against their historical averages. Since we believe the economy will improve in 2020, we think it is still safe to own this stock right now.

Data by YCharts

Fund Analysis

IYT’s portfolio

Stocks in IGF’s portfolio can be categorized into 5 main categories: railroads, air freight & logistics, airlines, trucking, and marine. As can be seen from the chart below, railroad stocks represent about 33.4% of IGF’s portfolio, followed by air freight & logistics (about 23.70%), airlines (17.86%), trucking (17.58%), and marine (7.2%).

Source: iShares Website

Stocks in IYT’s portfolio are economically sensitive stocks as their businesses heavily depend on the strength of the economy. In an economic downturn, it will be challenging to grow their shipping volumes. On the other hand, when the economy is booming, shipping volumes should increase.

High exposure to railroad stocks is beneficial

We like the fact that IYT has a high exposure to railroad stocks. As can be seen from the chart below, U.S. railroad’s projected demand for freight transportation is expected to grow from 17.8 billion tons to 21.9 billion tons in 2030. This represents a growth rate of 1.5% annually. While this growth rate is only modest, we need to recognize that most of the railway key infrastructures have already been built decades ago. As shipping volume increases, these railway companies can add carts without incurring much more expenses. Therefore, these companies can continue to improve their operating efficiency and grow their earnings as long as they can continue to grow their shipping volumes and increase their shipping rates. At the moment, it is still much more expensive to ship large volumes of products by trucks. This makes railroad stocks the only economically viable option to transport large volume of products across the continent.

Source: Statista

Air freights and logistics subsector can continue to benefit from the rise of e-commerce

IYT’s air freights and logistics stocks (e.g. UPS and FedEx) should continue to benefit from the rise of e-commerce. As can be seen from the chart below, e-commerce sales are expected to grow from $468.1 billion in 2017 to $740.4 billion in 2023. This is equivalent to a compound annual growth rate of about 6%. Therefore, we expect strong growth to continue in the next few years.

Source: Statista on E-commerce

IYT’s portfolio of stocks are mostly moaty stocks

Most stocks in IYT’s portfolio are stocks that have competitive advantages over its peers. In fact, all of the top-10 stocks receive narrow or wide moat status, according to Morningstar’s research. In fact, 8 out of 10 stocks receive wide moat status. These top 10 stocks represent about 71.4% of its total portfolio. Most of these stocks are companies that its customers will continue to rely on, and it is very difficult to find alternative options to ship these products economically and efficiently. For example, railroad companies such as Norfolk Southern (NSC) and Union Pacific (UNP) are companies that hold strategic infrastructures that its customers needed. To ship the same volume through alternative methods such as trucks will be very expensive.

Morningstar Moat Status

% of ETF

Norfolk Southern

Wide

10.80%

Union Pacific

Wide

10.04%

Kansas City Southern (KSU)

Wide

8.53%

FedEx (FDX)

Narrow

8.47%

United Parcel Service (UPS)

Wide

6.61%

J.B. Hunt Transport Services (JBHT)

Narrow

6.48%

Landstar System (LSTR)

Wide

6.28%

United Airlines (UAL)

None

4.96%

Kirby (KEX)

None

4.92%

C.H. Robinson Worldwide (CHRW)

Wide

4.33%

Total:

71.42%

Source: Created by author

IYT is trading at a discount to the S&P 500 Index

IYT has delivered an excellent total return of 192% in the past 10 years. IYT’s P/E ratio of 15.56x is much lower than the ratio of 19.42x of the S&P 500 Index. Similarly, IYT’s price to cash flow ratio of 6.86x is also much lower than the S&P 500 Index’s 10.03x.

IYT

S&P 500 Index

P/E Ratio

15.56x

19.42x

Price to Cash Flow Ratio

6.86x

10.03x

Dividend Yield (%)

1.65%

1.73%

Sales Growth (%)

11.66%

7.07%

Source: Morningstar, Created by author

Next, we will compare stocks in IYT’s portfolio with their own historical averages. As the table below shows, the average forward P/E ratio of its top-10 holdings (71.4% of the total portfolio) is 17.2x. This is only slightly higher than the 5-year average of 17.0x. This suggests that IYT is not expensive. In fact, it is fairly valued.

Forward P/E

5-year Average P/E

% of ETF

Norfolk Southern

17.15

16.48

10.80%

Union Pacific

18.76

17.1

10.04%

Kansas City Southern

19.46

17.75

8.53%

FedEx

13.7

14.09

8.47%

United Parcel Service

14.43

16.55

6.61%

J.B. Hunt Transport Services

19.49

20.17

6.48%

Landstar System

18.69

19.58

6.28%

United Airlines

6.81

7.75

4.96%

Kirby

24.94

22.49

4.92%

C.H. Robinson Worldwide

17.79

19.05

4.33%

Total:

17.2

17.0

71.42%

Source: Created by author

Risks and Challenges

Concentration risk

IYT holds only about 25 stocks. As we have discussed earlier, its top 10 stocks represent 71% of the total portfolio. Therefore, there is considerable concentration risk.

An economic recession

Stocks in IYT’s portfolio are generally sensitive to the strength of the economy, perhaps much more so than many defensive stocks. In an economic recession, consumers will reduce spending. This will result in lower shipping demand. Therefore, stocks in IYT’s portfolio will likely be impacted negatively.

Higher volatility

Since stocks in IYT’s portfolio are much more sensitive to the strength of the economy, its stocks can be much more volatile in an economic recession. As can be seen from the chart below, in an economic recession in 2008/2009, its shares are much more volatile than the S&P 500 Index. Similarly, in an economic slowdown in 2016, IYT’s fund price declined much more than the S&P 500 Index.

ChartData by YCharts

Investor Takeaway

IYT’s valuation appears to be fairly valued. Since we do not believe a recession will happen in 2020, we think it is safe to hold on to this ETF. In fact, if you believe the U.S. economy will strengthen in 2020, IYT is a good candidate to invest in.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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2020-01-10