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Aerospace and Defense ETFs Rise on Strong Q2 Earnings

Zacks Equity Research
A slew of impressive earnings reports led to solid trading in aerospace and defense ETFs.

The recovery of global GDP, stable commodity prices and heightened passenger travel demand are likely to ramp up growth in the commercial aircraft sector in 2018. On the defense sector side, heightened global security threats as well as higher defense spending from other major regional powers such as India, China and Japan are likely to drive defense sector revenue growth in 2018 and beyond.

Additionally, strong earnings growth is adding fuel to the overall aerospace and defense space. About 94.6% of the sector’s market capitalization on the S&P 500 index that have reported results are up 23.6% from the same period last year on 7.6% higher revenues, with 77.8% beating EPS and 88.9% topping revenue estimates.

United Technologies UTX, Northrop Grumman NOC, General Dynamics GD, Lockheed Martin LMT and Raytheon RTN beat the Zacks Consensus Estimate, while Boeing BA missed. The Zacks Consensus Estimate for revenues was surpassed by all (Read: 5 ETFs to Buy as Q2 GDP Growth Hits 4-Year High of 4.1%).

Earnings in Focus

Boeing reported second-quarter earnings per share of $3.33, missing the Zacks Consensus Estimate of $3.45 and increasing from the year-ago quarter number of $2.55. The company reported $24.26 billion in revenues, surpassing the Zacks Consensus Estimate of $23.98 billion and the year-ago figure of $22.74 billion.

Boeing raised its 2018 revenue guidance from $96-$98 billion to $97-$99 billion, while maintained the earnings per share guidance in the range of $14.30-$4.50.

United Technologies topped the earnings estimate by 12 cents and revenue estimate by $441 million. On a year-over-year basis, earnings per share and revenues increased from $1.85 and $15.28 billion, respectively.

United Technologies has raised its 2018 earnings view to $7.10-$7.25 per share from the prior guidance of $6.95-$7.15. Revenues for the full year are predicted within the $63.5-$64.5 billion range.

General Dynamics reported EPS of $2.82, beating the Zacks Consensus Estimate of 2.49 and improving from the year-ago earnings of $2.45. Revenues came in at $9.19 billion, above the estimated $9.10 billion and the year-ago quarter’s $7.67 billion.
Northrop Grumman reported EPS of $3.93, which beat the Zacks Consensus Estimate of $3.83 and improved 24.76% year over year. Revenues of $7.12 billion also edged past the estimated $7.00 billion and improved from $6.37 billion in the year-ago quarter.

Northrop Grumman currently expects to generate revenues of $30 billion during 2018, in line with its earlier guidance. On the bottom-line front, the company has raised its outlook. Northrop Grumman now expects to generate earnings in the range of $16.60-$16.85 per share compared with the earlier guidance range of $16.20-$16.45.

Lockheed Martin’s earnings of $4.31 per share comfortably beat the estimate by 42 cents and revenues of $13.40  billion surpassed by $649 million. The numbers are up from $3.23 and $12.69, respectively, in the year-ago quarter.

For 2018, Lockheed Martin has raised its financial guidance. The company currently expects to generate revenues in the range of $51.6-$53.1 billion, higher than the earlier provided projection of $50.35-$51.85 billion. The company expects earnings per share in the range of $16.75-$17.05, higher than the earlier-announced guidance of $15.80-$16.10.

Raytheon came up with a positive surprise of 5.60% on earnings and 1.94% on revenues. Earnings and revenues increased 23.7% and 5.5%, respectively, from the year-ago quarter.

Raytheon has raised its full-year guidance for the top and bottom lines. The company currently expects 2018 revenues in the range of $26.7-$27.2 billion, up from the prior guidance range of $26.5-$27 billion. It now expects earnings from continuing operations of around $9.77-$9.97 per share, up from the $9.70-$9.90 band.

ETFs in Focus

A slew of impressive earnings reports led to solid trading in the space as the sector gained 1.7% (the aggregate one-day stock market reaction to earnings releases) in response to the earnings announcement.  As a result, ETFs targeting the sector have also got boost in a month’s time.

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 38 securities in its basket, the in-focus six firms account for a combined 42.9% share. The fund has AUM of 5.69 billion and has an expense ratio of 0.43%. It has gained 3.3% in a month and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

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 35 holdings with at least 3% holding in each of the above-mentioned six companies. The fund has AUM of $1.39 billion and an expense ratio of 0.35%.It has gained 4.70% in a month. It currently has a Zacks ETF Rank of 2 with a Medium risk outlook.

Invesco Aerospace & Defense ETF PPA

The Invesco Aerospace & Defense ETF is based on the SPADE™ Defense Index. The fund has an AUM of $1.01 billion and an expense ratio 0f 0.61%. It comprises 53 holdings and the in-focus six firms hold 37.03%. The fund has gained 3.44% in a month. It currently has a Zacks ETF Rank #2 with a Medium risk outlook.

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