U.S. markets open in 7 hours 27 minutes
  • S&P Futures

    3,602.00
    +26.00 (+0.73%)
     
  • Dow Futures

    29,787.00
    +241.00 (+0.82%)
     
  • Nasdaq Futures

    11,968.25
    +63.00 (+0.53%)
     
  • Russell 2000 Futures

    1,837.60
    +20.50 (+1.13%)
     
  • Crude Oil

    43.66
    +0.60 (+1.39%)
     
  • Gold

    1,824.70
    -13.10 (-0.71%)
     
  • Silver

    23.42
    -0.21 (-0.88%)
     
  • EUR/USD

    1.1858
    +0.0013 (+0.11%)
     
  • 10-Yr Bond

    0.8570
    0.0000 (0.00%)
     
  • Vix

    22.66
    -1.04 (-4.39%)
     
  • GBP/USD

    1.3342
    +0.0020 (+0.15%)
     
  • USD/JPY

    104.4550
    -0.0330 (-0.03%)
     
  • BTC-USD

    18,371.15
    +38.64 (+0.21%)
     
  • CMC Crypto 200

    367.77
    +6.34 (+1.75%)
     
  • FTSE 100

    6,333.84
    -17.61 (-0.28%)
     
  • Nikkei 225

    26,165.59
    +638.22 (+2.50%)
     

Should You Invest in Aerospace & Defense ETFs After Q3 Earnings?

Sweta Jaiswal, FRM
·5 min read

The airline sector has been one of the worst-hit spaces due to the coronavirus outbreak. The virus’ spread resulted in declining air travel, with restrictions imposed by the government. Consequently, airlines’ top lines suffered a material impact as passenger revenues accounts for a significant amount of their total revenue base. In fact, with the pandemic showing almost no signs of waning, air travel demand is likely to remain sluggish, at least in the near term. Studying the stressed balance sheets of the carriers, it will be safe to say that the space is likely get a boost from vaccine development and introduction of another round of fiscal stimulus.

The pandemic has also impacted operations of major players in the defense sector as well. Some defense manufacturers had to either temporarily close production or were operating with a constricted workforce. Moreover, deliveries of finished products were largely affected by travel restrictions and social-distancing measures. However, Trump’s generous defense budget might have provided some cushion to the space from the pandemic-induced losses.

Earnings in Focus

On Oct 20, Lockheed Martin LMT reported third-quarter 2020 adjusted earnings of $6.25 per share, beating estimates by 3% and revenues of $16.50 billion surpassed estimates by roughly 1.8%. The numbers improved from earnings and revenues of $5.66 and $15.17 billion, respectively, a year ago.

Also, the company’s cash and cash equivalents totaled $3.59 billion as of Sep 27, 2020, compared with $1.51 billion at the end of 2019.

For 2020, Lockheed Martin has updated its financial guidance. The company presently expects to generate revenues of $65.25 billion compared with the range of $63.50-$65 billion projected earlier. Earnings per share are currently projected at $24.45 versus the previous range of $23.75-$24.05 for 2020.

On Oct 27, Raytheon Technologies RTX reported third-quarter 2020 adjusted earnings of 58 cents per share, beating the Zacks Consensus Estimate of 48 cents. However, the bottom line slid 54.3% from the year-ago quarter’s $1.27. GAAP sales came in at $14.75 billion. It had reported GAAP sales worth $11.37 billion in the year-ago quarter. However, the metric missed the consensus estimate of $15.13 billion.

Raytheon Technologies ended the third quarter with cash and cash equivalents of $10 billion, up from $4.94 billion as of Dec 31, 2019.

On Oct 28, Boeing BA reported third-quarter 2020 adjusted loss of $1.39 per share against the year-ago quarter’s earnings of $1.45 per share. However, the metric was narrower than the Zacks Consensus Estimate of a loss of $2.33. Including one-time items, the company incurred GAAP loss of 79 cents per share against earnings of $2.05 witnessed in the third quarter of 2019.

The company reported $14.14 billion in revenues, surpassing the Zacks Consensus Estimate of $13.81 billion by 2.4%. The top line declined 29.2% from the year-ago quarter’s $19.98 billion.

Boeing exited the third quarter with cash and cash equivalents of $10.56 billion and short-term and other investments of $16.55 billion. At the end of 2019, the company had $7.64 billion of cash and cash equivalents and $0.93 billion of short-term and other investments.

On Oct 28, General Dynamics GD reported third-quarter 2020 earnings from continuing operations of $2.90 per share, outpacing the Zacks Consensus Estimate of $2.85 by 1.8%. Revenues came in at $9.43 billion, lagging the consensus estimate of $9.60 billion and declining from the year-ago quarter’s $9.76 billion.

As of Sep 27, 2020, General Dynamics’ cash and cash equivalents were $1.47 billion compared with $902 million on Dec 31, 2019.

On Oct 22, Northrop Grumman NOC reported earnings per share of $5.89, beating the Zacks Consensus Estimate of $5.60 by 5.2% in the third quarter of 2020. Moreover, the bottom line rose 7% from $5.49 in the year-ago quarter. Revenues of $9.08 billion outpaced the consensus estimate of $8.84 billion.

It’s cash and cash equivalents as of Sep 30, 2020, were $5 billion, up from $2.25 billion as of Dec 31, 2019.

The company raised its 2020 financial guidance and projects to generate revenues of $35.7-$36 billion. Northrop Grumman has also lifted its full-year earnings expectations from $22.00-$22.40 to $22.25-$22.65 per share.

Market Impact

The U.S. Aerospace and Defense ETFs with notable exposure to most of these 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 51.5% share of the fund. The fund has AUM of $2.37 billion and expense ratio of 0.42%. The fund has lost 2.8% since Oct 19 (as of Nov 4). It has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook (see: all the Industrial ETFs here).

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 nearly 16.7% weight. It has AUM of $958.1 million and an expense ratio of 0.35%. The fund has lost 1.9% since Oct 19 (as of Nov 4). 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 AUM of $598.4 million and an expense ratio of 0.59%. It comprises 55 holdings and the in-focus five firms hold 30.9%. The fund has lost 0.4% since Oct 20 (as of Nov 4). It currently has a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: Investing Strategies to Play If Republican Trump Is Re-elected).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free>>

Click to get this free report 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 Aerospace Defense ETF (XAR): ETF Research Reports iShares U.S. Aerospace Defense ETF (ITA): ETF Research Reports Invesco Aerospace Defense ETF (PPA): ETF Research Reports Raytheon Technologies Corporation (RTX) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report