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Aerospace and Defense ETFs Gain Despite Mixed Q3 Earnings

Sweta Jaiswal, FRM

The year 2019 has been an overwhelming one for the U.S. Aerospace and Defense industry so far. The Dow Jones U.S. Aerospace & Defense Index has returned 27.4% year to date. Solid improvement in global air traffic has boosted commercial airplane demand, providing support to the U.S. Aerospace and Defense industry. Per the projections made by the International Air Transport Association, the passenger count might double to 8.2 billion in 2037.

Moreover, demand for new jets is expected to rise as a large fleet of old airplanes is set to retire over the next couple of years. In fact, growing jet demand is expected to drive the aviation services market.

Meanwhile, the U.S. House of Representatives had earlier passed a $733-billion defense policy bill, $17 billion short of the proposed Republican-led Senate bill. Notably, the proposed budget reflects higher spending plans of around $57.7 billion on Aircraft, 166% more than the previous year’s budget. Moreover, $34.7 billion has been allotted to Shipbuilding, reflecting an 89.6% rise over the prior fiscal year. Also, issues in the Middle East along with intensifying global geopolitical tensions are expected to continue to boost demand in the niche market (read: Airlines ETF Fly Higher Despite Mixed Earnings).

Recently, Boeing BA, United Technologies UTX, Northrop Grumman NOC, General Dynamics GD and Lockheed Martin LMT reported quarterly results with all topping the Zacks Consensus Estimate for earnings, except for Boeing. Notably, all companies beat the revenue estimates, except for Northrop Grumman.

Earnings in Focus

Boeing reported third-quarter adjusted earnings of $1.45 per share compared with the year-ago quarter’s $3.58. This downside can be primarily blamed on reduced 737 deliveries. The metric missed the Zacks Consensus Estimate of $2.04 by 28.9%. Excluding one-time items, the company’s GAAP earnings came in at $2.05 per share compared with $4.07 in the third quarter of 2018.

The company reported $19.98 billion in revenues, beating the Zacks Consensus Estimate of $19.34 billion by 3.3%. The top line declined 21% from the year-ago quarter’s $25.15 billion on account of lower 737 deliveries and higher defense and services volume.

Due to uncertainty related to the timing and conditions of the 737 MAX fleet’s return to service, Boeing has refrained from issuing a guidance for now. Following the earnings release on Oct 23, the stock gained around 0.9% to close at $339.91 on Oct 31.

United Technologies reported third-quarter adjusted earnings of $2.21 per share, surpassing the Zacks Consensus Estimate of $2.03. The bottom line also improved from the year-ago $1.93.

Revenues came in at $19.50 billion, up 18.1% year over year. The metric surpassed the consensus estimate of $19.31 billion. The year-over-year upside was led by 5% contribution from organic sales growth and 14% positive impact of acquisitions, partially offset by 1% impact of currency translation.

The company has revised 2019 earnings guidance to $8.05-$8.15 per share from $7.90-$8.05 projected earlier. For 2019, it currently expects revenues in the range of $76-$76.5 billion compared with $75.5-$77 billion guided earlier. It continues to expect 4-5% organic sales growth for 2019. Since the earnings release on Oct 22, the stock has gained around 3.8% to close at $143.58 on Oct 31.

General Dynamics reported third-quarter 2019 earnings from continuing operations of $3.14 per share, surpassing the Zacks Consensus Estimate of $3.06 by 2.6%. Operating earnings improved 10.2% from $2.85 per share in the year-ago quarter. Revenues came in at $9.76 billion, above the estimated $9.68 billion and the year-ago quarter’s $9.09 billion. However, following the earnings release on Oct 23, the stock lost around 1.7% to close at $176.8 on Oct 31.

Northrop Grumman’s reported earnings per share of $5.49 beat the Zacks Consensus Estimate of $4.74 by 15.8%. However, the bottom line declined 22.8% from $7.11 reported in the year-ago quarter. Revenues of $8.48 billion missed the estimated $8.55 billion.

Northrop Grumman expects to generate revenues of $34 billion for 2019. However, raised its full-year earnings expectations from $19.30-$19.55 to $20.10-$20.35 per share. Following the earnings release on Oct 24, the stock lost around 0.2% to close at $352.48 on Oct 31.

Lockheed Martin’s earnings of $5.66 per share comfortably beat estimates by 12.5% and revenues of $15.17 billion surpassed estimates by 1.3%. The numbers improved from $5.14 and $14.32 billion, respectively, a year ago.

For 2019, Lockheed Martin raised its financial guidance. The company currently expects to generate revenues of $59.10 billion compared with the earlier guided range of $58.25-$59.75 billion. Earnings per share for 2019 are currently anticipated to be $21.55 compared with $20.85-$21.15 guided earlier.  Since the earnings release on Oct 22, the stock gained around 0.7% to close at $376.68 on Oct 31.

Market Impact

The U.S. Aerospace and Defense ETFs with notable exposure to most of these companies seem to have benefited from the earnings releases of major players (see: all the Industrial ETFs here).

iShares U.S. Aerospace & Defense ETF ITA

This fund provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 34 securities in its basket, the in-focus five firms account for a combined 53.2% share of the fund. ITA has gained about 2.5% since Oct 21 to close at $220.10 on Oct 31. The fund has AUM of 5.39 billion and expense ratio of 0.42%. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Bet on Top-Notch Sector ETFs & Stocks to Sparkle Q4).

SPDR S&P Aerospace & Defense ETF XAR

The fund seeks to track a modified equal-weighted index, which provides the potential for unconcentrated industry exposure across large, mid and small-cap stocks. It comprises 30 holdings with the above-mentioned five companies having nearly 20% weight. XAR has gained about 2.2% since Oct 21 to close at $105.61 on Oct 31. It has AUM of $1.72 billion and an expense ratio of 0.35%. It currently has a Zacks ETF Rank of #2 with a Medium risk outlook (read: Top-Ranked Sector ETFs to Buy for Q4).

Invesco Aerospace & Defense ETF PPA

The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. It has AUM of $1.07 billion and an expense ratio of 0.59%. It comprises 48 holdings and the in-focus five firms hold 31.7%. PPA has gained about 2.2% since Oct 21 to close at $67.34 on Oct 31. It currently has a Zacks ETF Rank #2 with a Medium risk outlook (read: 10 Top-Ranked ETFs Beating S&P 500 This Year).

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Lockheed Martin Corporation (LMT) : Free Stock Analysis Report
 
General Dynamics Corporation (GD) : Free Stock Analysis Report
 
Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
 
The Boeing Company (BA) : Free Stock Analysis Report
 
United Technologies Corporation (UTX) : Free Stock Analysis Report
 
SPDR S&P Aerospace & Defense ETF (XAR): ETF Research Reports
 
Invesco Aerospace & Defense ETF (PPA): ETF Research Reports
 
iShares U.S. Aerospace & Defense ETF (ITA): ETF Research Reports
 
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