Strong Earnings Boost Aerospace And Defense ETFs

The earnings season is off to a flying start with almost 75% of the companies having surpassed expectations. The performance has been quite impressive for Aerospace and Defense companies, with major players beating market estimates.

Boeing Company (NYSE:BA) , United Technologies (NYSE:UTX) , Northrop Grumman (NYSE:NOC) and Lockheed Martin Corporation (NYSE:LMT) beat earnings estimates, while General Dynamics (NYSE:GD) matched. However, the revenue performance was a mixed bag (read: Aerospace and Defense ETFs Soar on U.S-Saudi Deal).

Given the escalating geopolitical risks involving Syria and North Korea, demand for defense products is increasing. Moreover, airlines have been spending aggressively on renewals of their fleet worldwide. These factors are a positive for this industry and make investments in this sector an attractive option (read: ETFs to Top/Flop as Trump Lays Foundation for Future America).

Earnings in Focus

Boeing Company reported second-quarter 2017 adjusted earnings of $2.56 per share, beating the Zacks Consensus Estimate of $2.32 and increasing from last year’s loss of $0.44 per share. However, it failed to beat the consensus estimate on the revenue front. The company reported $22.739 billion in revenues for the quarter in discussion, missing the consensus estimate of $23.009 billion and declining 8.14% from $24.755 billion a year ago.

Non-GAAP EPS guidance for 2017 was raised to the range of $9.8–$10 from $9.2–$9.4 previously. It’s shares price increased 9.8% at market close on Wednesday, July 26, 2017, primarily due to the earnings beat.

United Technologies reported second-quarter adjusted earnings per share of $1.85, beating the Zacks Consensus Estimate of $1.77 and increasing 1.64% from $1.82 in the year-ago quarter. The company reported $15.280 billion in revenues for the quarter, beating the consensus estimate of $15.182 billion and increasing roughly 2.72% from $14.874 billion in the year-ago quarter.

Non-GAAP EPS guidance for 2017 was raised to the range of $6.45–$6.60 from $6.3–$6.6 previously. Its share price was up initially on Tuesday, July 25, 2017, owing to the better-than-expected results but closed around 2.2% lower at market close on July 25, 2017. This was primarily due to the fact that the U.K. economy reported weak GDP growth in the second quarter of 2017 and United Technologies is highly exposed to the economy.

General Dynamics reported second-quarter adjusted earnings of $2.45, in line with the Zacks Consensus Estimate of $2.45 and up roughly 0.4% from $2.44 in the year-ago quarter. However, it failed to beat the consensus estimate on the revenue front. The company reported $7.675 billion in revenues in the second quarter, missing the consensus estimate of $7.805 billion but increasing 0.13% from $7.665 billion a year ago.

Non-GAAP EPS guidance for 2017 was raised to the range of $9.7–$9.75 from $9.5–$9.55 previously. Its shares closed 4.4% lower at market close on Wednesday, July 26, 2017, primarily due to the revenue miss.

Northrop Grumman reported second-quarter adjusted earnings of $3.15 per share, beating Zacks the Consensus Estimate of $2.84 and increasing 21.15% from $2.60 in the year-ago quarter. Moreover, it also beat the consensus estimate on the revenue front. The company reported $6.375 billion in revenues in the second quarter, beating the consensus estimate of $6.214 billion, and increasing roughly 6.25% from $6 billion a year ago.

Non-GAAP EPS guidance for 2017 was raised to the range of $12.1–$12.4 from $11.8–$12.1 previously. Its share price remained relatively flat, closed 0.07% lower at market close on Wednesday, July 26, 2017.

Lockheed Martin reported second-quarter adjusted earnings of $3.23 per share, beating the Zacks Consensus Estimate of $3.1 but declining roughly 2.7% from $3.32 in the year-ago quarter. Moreover, it also beat the consensus estimate on the revenue front. The company reported $12.685 billion in revenues in the second quarter, beating the consensus estimate of $12.472 billion, but decreasing roughly 1.8% from $12.914 billion a year ago.

Its share price closed roughly 0.5% lower at market close on Tuesday, July 18, 2017, primarily due to a decline in year-over-year earnings.

We will now discuss a few ETFs with high exposure to the companies discussed (read: Top ETF Stories of May).

iShares U.S. Aerospace & Defense ETF (HM:ITA)

This fund seeks to provide an exposure to the aerospace and defense industry. It has AUM of $3.44 billion and charges a fee of 44 basis points a year. The fund has 10.11% exposure to Boeing, 8.27% to United Technologies, 7.56% to Lockheed Martin, 6.7% to General Dynamics, and 6.02% to Northrop Grumman (as of July 25, 2017). The fund has returned 27.51% in the last one year and 17.04% year to date (as of July 26, 2017). It currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

SPDR S&P Aerospace & Defense (NYSE:XAR) ETF (LON:XAR)

This fund has AUM of $709.61 million and charges a fee of 35 basis points a year. The fund has 4.04% exposure to Boeing, 3.78% to Lockheed Martin, 3.71% to Northrop Grumman, 3.68% to General Dynamics and 3.60% to United Technologies (as of July 25, 2017). The fund has returned 27.3% in the last one year and 15.53% year to date (as of July 26, 2017). It currently has a Zacks ETF Rank #1 with a Medium risk outlook.

PowerShares Aerospace & Defense Portfolio ETF PPA

This fund has AUM of $660.2 million and charges a fee of 64 basis points a year. The fund has 6.95% to Boeing, 6.78% to Lockheed Martin, 6.65% to General Dynamics, 6.46% exposure to United Technologies and 5.23% to Northrop Grumman (as of July 25, 2017). The fund has returned 21.49% in the last one year and 14.59% year to date (as of July 26, 2017). It currently has a Zacks ETF Rank #1 with a Medium risk outlook.

To Conclude

We believe that the current market scenario presents a strong case for investing in the aerospace and defense industry. Growing demand for products and better-than-expected results make these companies an attractive investment option.

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