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Aerospace and Defense ETFs Rally on Strong Q1 Earnings

Sweta Jaiswal, FRM
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The year 2019 has been overwhelming for the U.S. Aerospace and Defense industry so far. The Dow Jones U.S. Aerospace & Defense Index has returned 21.6% year to date. The Non-US members of the North Atlantic Treaty Organization have agreed to spend an additional $100 billion in defense, raising optimism in the industry. Trump has proposed a 5% or $34 million increase in defense spending, the total being $750 billion, beating Pentagon officials’ expectation of $733 billion, which would mark a 2.4% increase over last year’s budget. 

Moreover, raised defense budgets of India and Japan, issues in the Middle East along with intensifying global geopolitical tensions are expected to continue boosting demand in the niche market (read: A Spread of Top-Ranked ETFs That Crushed the Market in Q1).

Meanwhile, a steady rise in global air traffic on strong trends in the emerging markets of China and India along with the established markets of Europe and North America has accelerated demand for commercial airplanes. Moreover, demand for new jets is expected to increase as a large fleet of old airplanes is set to retire in the next couple of years. In fact, increasing jet demand is expected to drive the aviation services market (read: Why Aerospace & Defense ETFs are Soaring in 2019).

Recently, Boeing BA, United Technologies UTX, Northrop Grumman NOC, General Dynamics GD and Lockheed Martin LMT reported their quarterly results with each topping the Zacks Consensus Estimate for earnings.  In fact, the Zacks Consensus Estimate for revenues was surpassed by all, except for Northrop Grumman.

Earnings in Focus

Boeing reported first-quarter earnings per share of $3.16, beating the Zacks Consensus Estimate of $3.11. The bottom line, however, reflected a decline of 13% from $3.64 in the year-ago quarter. The company reported $22.92 billion in revenues, surpassing the Zacks Consensus Estimate of $22.26 billion. However, the top line declined 2% from the year-ago quarter’s $23.38 billion.

Due to the uncertainty surrounding the timing and conditions associated with the return to service of the 737 MAX fleet, Boeing did not issue any guidance for now.

United Technologies topped earnings estimates by 9.1% and revenue estimates by 1.6%. On a year-over-year basis, earnings per share and revenues increased from $1.77 and $15.24 billion, respectively.

The company has revised 2019 earnings per share view to $7.80-$8.00 from the prior guidance of $7.70-$8.00. For 2019, it continues to expect revenues between $75.5 billion and $77 billion (read: S&P 500 Hit New Records: Buy These High-Beta ETFs & Stocks).

General Dynamics reported earnings per share of $2.56, beating the Zacks Consensus Estimate of $2.38. However, earnings declined 3.4% from $2.65 a year ago. Revenues came in at $9.26 billion, above the estimated $8.89 billion and the year-ago quarter’s $7.54 billion.

Northrop Grumman reported earnings per share of $5.06, which beat the Zacks Consensus Estimate of $4.59 and improved 5.6% year over year. Revenues of $8.19 billion missed the estimated $8.32 billion but improved from $6.74 billion in the year-ago quarter.

Northrop Grumman expects to generate revenues of around $34 billion in 2019. However, earnings per share are projected in the range of $18.90-$19.30 compared with the earlier view of $18.5-$19.

Lockheed Martin’s earnings of $5.99 per share comfortably beat estimates by 39.6% and revenues of $14.34 billion surpassed estimates by 13.4%. The numbers are up from $4.02 and $11.64 billion, respectively, in the year-ago quarter.

For 2019, Lockheed Martin raised its financial guidance. The company currently projects revenues of $56.75-$58.25 billion compared with $55.75-$57.25 billion expected earlier. Earnings per share for 2019 are estimated in the $20.05-$20.35 range compared with $19.15-$19.45 guided earlier. 

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 in the last two trading days (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 52.8% share of the fund. ITA has gained about 1.5% in the past two trading days to close at $208.21 on Apr 24. The fund has AUM of 5.23 billion and expense ratio of 0.43%. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Beat Q1 Earnings Woes With These Sector ETFs & Stocks).

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 31 holdings with the above-mentioned five companies having nearly 19.5% weight. XAR has gained about 2% in the past two trading days to close at $96.52 on Apr 24. It has AUM of $1.36 billion and an expense ratio of 0.35%. It currently has a Zacks ETF Rank of #2 with a Medium risk outlook (read: Prescribing 5 ETFs for a Healthy Portfolio in Q2).

Invesco Aerospace & Defense ETF PPA

The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. It has AUM of $921.4 million and an expense ratio of 0.60%. It comprises 48 holdings and the in-focus five firms hold 32.3%. PPA has gained about 1.6% in the past two trading days to close at $61.29 on Apr 24. It currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: After a Lull, Will Defense-Related ETFs Surge Ahead?).

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