Solid Aerospace and Defense Stock Earnings Put These ETFs in Focus

The Q2 earnings season so far has been quite reassuring and there is a notable improvement in the overall earnings picture. As of the end of last week, 229 S&P 500 companies, accounting for 58.1% of the index’s total market capitalization, have already reported.

The real improvement came in from the growth and guidance front. The growth rates are better than prior quarters with more companies coming ahead of estimates and there is also some progress on guidance (read: Top Ranked Defense Stocks and ETFs Ready to Explode Higher).

Total earnings for these companies are up 9.8% on 5.4% higher revenues, with 69.4% beating EPS estimates and 63.8% coming ahead of revenue estimates.

Aerospace & Defense, a relatively smaller sector within the S&P 500, has come out with a series of estimate beating results. Growing commercial opportunities on the heels of an improving global economy, a pick-up in defense spending in some countries and technological innovation and acquisitions have actually made up for the military budget cuts.

Strong performance in the commercial aerospace sector is being driven by growing demand for passenger air travel worldwide. Moreover, mounting tensions in Eastern Europe could act as a catalyst and spur Western countries to boost their spending on defense.

This industry currently has a Zacks Industry Rank in the top 13% and it is seeing some strong fundamental factors underpinning its lofty position too.

Below we have highlighted in greater detail the earnings of some of the aerospace and defense companies.

Solid Quarterly Results

Boeing (BA) came out with excellent results beating the estimates on earnings buoyed by strong commercial aircraft deliveries and production. Though it missed on the revenue part, the company raised both the low-end and upper-end of its 2014 adjusted earnings guidance.

The company, however, booked some charges related to its KC-46A Tanker program which has impacted its margins during the last quarter. Also, concerns as to whether the company might overrun its total cost on its program have kept the share prices soft following the earnings announcement.

Nonetheless the company received new orders and its backlog also remains strong. The company expects strong global demand for commercial airplanes over the next two decades.

United Technologies Corp (UTX) beat the Zacks Consensus Estimate for earnings as well as revenues and also boosted its guidance for the rest of the year. The company is also increasing shareholder value through its stock repurchase program.

At the same time, the company’s declining free cash flow due to rising capital expenditure is a matter of concern for analysts and investors. Still, the company has as of now solid free cash which gives us assurance that it has the ability to increase shareholder value through growing dividends and buybacks.

A top defense contractor, Lockheed Martin Corp. (LMT), also beat our estimates on both fronts and boosted its earnings guidance range for 2014. Also, the company continues to generate strong cash from operations while maintaining its cash deployment strategy.

General Dynamics Corporation (GD) beat the Zacks Consensus Estimate for earnings and also witnessed a sharp rise in its order backlog (read: A Comprehensive Guide to Aerospace & Defense ETFs).

Northrop Grumman Corporation (NOC) though missing on the bottom line raised both the top-end and bottom-end of its earnings guidance range for this year.

Top Aerospace and Defense ETFs to Play this Sector

For investors who want to play the broad sector in order to capture the impressive trend, there are a few aerospace and defense ETFs available. Below, we have highlighted some of the key points regarding these funds for investors seeking to make a basket play on the space:

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

With an asset base of $425.9 million, ITA is the largest player in this space. The fund trades in moderate volumes of roughly 69,000 shares a day and charges an annual fee of 44 basis points per year.

The fund holds 38 securities in its basket with United Technologies being the top stock. BA, UTX, LMT, GD and NOC combined make up more than a third of the fund. Aerospace takes about 53% of the asset base while defense accounts for 44%.

The fund pays a decent dividend yield of 1.54% and is a Zacks ETF Rank #1 (Strong Buy) fund (read: 2 Hot Summer ETFs Surging to #1 Ranks).

SPDR S&P Aerospace & Defense ETF (XAR)

XAR tracks the S&P Aerospace and Defense Select Industry index, which is a modified equal weighted index, holding a basket of three dozen stocks. This product has attracted an AUM of $58.7 million and charges 35 basis points in expenses.

The above five stocks make up a combined 18.5% of the total fund holdings, with Northrop Grumman occupying the top spot. The fund has a dividend yield of 1.77% and has a Zacks ETF Rank #1 or Strong Buy.

PowerShares Aerospace & Defense Portfolio (PPA)

PPA is based on the SPADE Defense Index that tracks companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security and aerospace operations.

The product has managed to garner $135.7 million in assets so far, which are currently invested in 53 securities. It charges 66 basis points in expenses and pays out dividends at a yield of 0.98%. Boeing, United Technologies, Lockheed, General Dynamic and Northrop together occupy 29% of total fund assets.

PPA currently is a Zacks ETF Rank #2 (Buy) fund (read: Top ETF Picks for Q2 Earnings Season).

Bottom Line

The Aerospace and Defense space has been a laggard this year due to concerns over lofty valuations, defense budget cuts and on cost overrun related to delayed deliveries.

However, the industry still has its solid fundamentals intact, which of course has been reflected in the slew of earnings beating results from some of the giants in the space. Moreover, these companies have raised their guidance indicating that the space has bright prospects going forward. It also has a solid Zacks Industry Rank, further underscoring its potential.

Investors should therefore use this sluggishness in the space to accumulate the above mentioned top ranked ETFs to play the otherwise bullish US Aerospace and Defense industry.

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