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Aerospace & Defense ETFs Soaring on Northrop-Orbital Deal

Sweta Killa
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The aerospace and defense sector is soaring this year largely due to Trump’s proposal of big spending. Recent North Korea missile strikes, Trump’s Afghanistan friendly plan, and wave of consolidation added to the strength (read: Trump's Afghanistan Rhetoric Helps/Hurts These ETFs).

The latest catalyst is U.S. defense contractor Northrop Grumman NOC, which has agreed to buy missile and rocket maker Orbital ATK Inc. OA for $9.2 billion (including debt).

Inside The Deal

Under the terms of the deal, Northrop will pay $134.50 per share in cash, reflecting a 22% premium over Orbital ATK’s closing stock price on Sep 15, and will assume $1.4 billion in debt. The acquisition, expected to be completed in the first half of 2018, has already been approved by the board of directors of both companies and is pending approval from their shareholders and regulators.

The proposed deal will bolster Northrop’s missile and space business by providing access to lucrative billion-dollar contracts with NASA and the U.S. Army as well as contracts with the U.S. Missile Defense Agency. It will also help Northrop to increase its arsenal of missile defense systems (read: 3 Top Ranked Aerospace and Defense ETFs for Your Portfolio).

The transaction is expected to be accretive to earnings per share and free cash flow per share in the first full year after completion, and will generate annual cost savings of $150 million by 2020. Following the completion of the transaction, Orbital ATK will likely be the new fourth business sector for Northrop.

Market Impact

The upcoming takeover of Orbital by Northrop added to the strength in the roaring sector. Orbital shares surged as much as 21.2% in yesterday’s trading session and crushed its average volume figures, as nearly 7.3 million shares moved hands compared with just 248,000 on average daily. On the other hand, NOC shares rose 3.3% at the close on the day on elevated volumes of 1.8 million compared with 613,000 on average (see: all the Industrial ETFs here).

As such, the aerospace and defense ETFs are flying with most of them hitting new highs. The trend is likely to continue given bullish fundamentals and a top Zacks ETF Rank #1 (Strong Buy).

iShares U.S. Aerospace & Defense ETF ITA

This fund provides investors exposure to the broad aerospace and defense industry by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 39 stocks, NOC and OA takes the sixth and fourteenth spots in the basket, respectively, with a combined 8.2% of assets. The fund has accumulated $4.2 billion in AUM while charging 44 bps in fees a year. Volume is good at around 214,000 shares. The ETF gained 1.7% in yesterday’s trading session to hit a fresh high of $174.02.

SPDR S&P Aerospace & Defense ETF XAR

This product offers equal-weight exposure to the industry’s large, mid and small-cap stocks thus preventing heavy concentration and suggesting higher diversification benefits. It follows the S&P Aerospace & Defense Select Industry Index, holding 38 stocks in its basket. Both Orbital and Northrop make up for at least 3.7% share each. The product has been able to manage $863.2 million in its asset base while trades in average daily volume of more than 105,000 shares. It charges 35 bps in annual fees and gained 2.2% on the day, hitting a fresh high of $77.50 (read: 6 Sector ETFs Must Buys Now).

Power Shares Aerospace & Defense Portfolio PPA

This ETF offers exposure to 53 companies that are involved in the development, manufacturing, operations as well as support of U.S. defense, homeland security and aerospace operations. It tracks the SPADE Defense Index, charging 61 bps in annual fees from investors. The fund has amassed $735.2 million in its asset base while trades in a lower average daily volume of under 88,000 shares. NOC occupies the seventh position in the fund’s portfolio at 5.1% while Orbital makes up for 1.6% share. The product was up 2.1% in yesterday’s trading session and just 3 cents away from the fresh high of $50.25.

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Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
 
Orbital ATK, Inc. (OA) : Free Stock Analysis Report
 
ISHARS-US AEROS (ITA): ETF Research Reports
 
SPDR-SP AER&DEF (XAR): ETF Research Reports
 
PWRSH-AERO&DEF (PPA): ETF Research Reports
 
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