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Will Aerospace & Defense ETFs Shine Post Q1 Earnings?

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·7 min read
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The coronavirus outbreak has dampened U.S. economic growth with airlines being one of the worst-hit sectors. The virus’ spread resulted in declining air travel with restrictions imposed by the government. Consequently, aviation stocks’ top lines suffered materially as passenger revenues account for a significant amount of their total revenue base.

Notably, studying the stressed balance sheets of the carriers, it will be safe to say that the space is likely get a boost from wider vaccine rollout and introduction of another round of fiscal stimulus.

The optimism surrounding the reopening of the U.S. economy seems to be increasing. Notably, the world’s largest economy is seeing a decline in the new daily coronavirus case count. There has also been a drop in the number of hospitalizations along with a decreasing death toll from coronavirus infections. Going on, an accelerated coronavirus vaccine rollout is leading to faster U.S. economic reopening of non-essential businesses and the return to normalcy. According to the U.S. Centers for Disease Control and Prevention (CDC), more than half of American adults have received at least one vaccine dose, per a Reuters article.

The pandemic also impacted the operations of major players in the defense sector. Some defense manufacturers had to either temporarily close production or operate with a constricted workforce. Moreover, deliveries of finished products were largely affected by travel restrictions and social-distancing measures.

Earnings in Focus

On Apr 20, Lockheed Martin LMT reported first-quarter 2021 earnings of $6.56 per share beating the Zacks Consensus Estimate of $6.32 by 3.8%. Meanwhile, net sales of $16.26 billion lagged estimates by roughly 0.5%. The numbers improved from the year-ago earnings and revenues of $6.08 and $15.65 billion, respectively.

Also, the company’s cash and cash equivalents totaled $2.93 billion as of Mar 28, 2021 compared with $3.16 billion at the end of 2020. 

Lockheed Martin has updated its financial guidance for 2021. The company currently expects to generate revenues of $67.30-$68.70 billion compared with $67.10-$68.50 billion projected earlier. Furthermore, it expects to deliver earnings per share in the $26.40-$26.70 range for 2021.

On Apr 27, Raytheon Technologies RTX reported first-quarter 2021 adjusted earnings of 90 cents per share, beating the Zacks Consensus Estimate of 88 cents. However, the bottom line declined 32.3% from the year-ago quarter’s $1.33. GAAP sales came in at $15.25 billion, up from the year-ago quarter’s $11.36 billion. Moreover, the metric lagged the Zacks Consensus Estimate of $15.38 billion by 0.8%.

Raytheon Technologies ended the first quarter with cash and cash equivalents of $8.58 billion as of Mar 31, 2021, down from $8.80 billion as of Dec 31, 2020.

On Apr 28, Boeing BA reported first-quarter 2021 adjusted loss of $1.53 per share, improving from the year-ago quarter’s loss of $1.70. Also, the metric was much wider than the Zacks Consensus Estimate of a loss of $1.17. Including one-time items, the company incurred a GAAP loss of 92 cents per share in the first quarter of 2021 compared with a loss of $1.11 incurred in the first quarter of 2020. It reported $15.22 billion in revenues, surpassing the Zacks Consensus Estimate of $14.38 billion by 5.8%. However, the top line declined 10% from the year-ago quarter’s $16.91 billion.

Boeing exited 2020 with cash and cash equivalents of $7.06 billion, and short-term and other investments of $14.86 billion. At the end of 2020, the company had $7.75 billion of cash and cash equivalents, and $17.84 billion of short-term and other investments. 

On Apr 28, General Dynamics GD reported first-quarter 2021 earnings from continuing operations of $2.48 per share, beating the Zacks Consensus Estimate of $2.31 by 7.4%. Additionally, revenues came in at $9.39 billion, outpacing the consensus estimate of $8.98 billion and increasing from the year-ago quarter’s $8.75 billion as well.

As of Apr 4, 2021, General Dynamics’ cash and cash equivalents were $1.81 billion compared with $2.82 billion as of Dec 31, 2020.

On Apr 29, Northrop Grumman NOC reported earnings per share of $6.57 in the first quarter of 2021, outpacing the Zacks Consensus Estimate of $5.48. Moreover, the bottom line increased 27.6% from $5.15 in the year-ago quarter. Revenues of $9.16 billion too outpaced the consensus estimate of $8.53 billion.

Its cash and cash equivalents as of Mar 31, 2021 were $3.52 billion, down from $4.91 billion as of Dec 31, 2020.

Northrop Grumman has raised its 2021 revenue and earnings guidance. The company currently expects to generate revenues in the range of $35.3-$35.7 billion compared with the prior guided range of $35.0-$35.4 billion during 2021. The company’s ongoing-year earnings are currently projected in the range of $24-$24.50 per share compared with the previous band of $21.80-$22.20 per share.

Market Impact

The U.S. Aerospace and Defense ETFs with notable exposure to most of the above-mentioned companies seem to have benefited from their earnings releases:

iShares U.S. Aerospace & Defense ETF ITA

This fund provides exposure to U.S. companies that manufacture commercial and military aircraft, and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 35 securities in its basket, the in-focus five firms account for a combined 54.3% share of the fund. The fund has an AUM of $2.99 billion and an expense ratio of 0.42%. The fund has lost 1.3% since Apr 19 (as of May 13). It has a Zacks ETF Rank #3 (Hold) with a Medium-risk outlook (read: Looking for Earnings Surprise? 6 Sector ETFs to Play).

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 33 holdings with the above-mentioned five companies having 20.1% weight. It has an AUM of $1.34 billion and an expense ratio of 0.35%. The fund has slipped 3.7% since Apr 19 (as of May 13). It currently has a Zacks ETF Rank of 3 with a Medium-risk outlook.

Invesco Aerospace & Defense ETF PPA

The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. It has an AUM of $749.2 million and an expense ratio of 0.59%. It comprises 54 holdings and the in-focus five firms hold 33.7%. The fund has dipped 0.6% since Apr 19 (as of May 13). It currently has a Zacks ETF Rank #3 with a Medium-risk outlook.

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Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
 
The Boeing Company (BA) : Free Stock Analysis Report
 
General Dynamics Corporation (GD) : Free Stock Analysis Report
 
Lockheed Martin Corporation (LMT) : Free Stock Analysis Report
 
SPDR-SP AER&DEF (XAR): ETF Research Reports
 
ISHARS-US AEROS (ITA): ETF Research Reports
 
INVS-AERO&DEF (PPA): ETF Research Reports
 
Raytheon Technologies Corporation (RTX) : Free Stock Analysis Report
 
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