Aerospace and Defense ETFs to Buy On Solid Industry Oulook [The Boeing Company, Lockheed Martin Corporation]

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May 9, 2014 3:59pm NYSE:ITA NYSE:PPA

defense stocksThough Q1 earnings season has seen a comparatively weak start, the aerospace and defense space has come out with a series of estimate beating results.


The world’s largest aerospace and defense manufacturers Boeing, Lockheed Martin and Northrop have all cheered the market by reporting higher-than-expected profits and raising their full year forecasts. Cost cutting strategies and operational efficiency enabled these biggies to keep their bottom-line growing.

Premier defense operators are expanding their operations through acquisitions and foreign orders to combat defense budget cuts in the U.S. These companies are also restructuring their businesses and keeping themselves abreast of technology to counter fresh competition.

Below we have highlighted in greater details the earnings of some of the aerospace and defense companies.

Earnings in Focus 

Aerospace giant, The Boeing Comapny (BA) reported adjusted first quarter 2014 earnings of $1.76 per share, beating the Zacks Consensus Estimate by 15.4%. Revenues from the company’s Commercial Airplane Segment surged 19% to $12.7 billion on higher delivery volume. Strong top-line growth and increased deliveries of its flagship commercial airframes, the 737, 777 and the 787, were the primary contributors for the strong results.

Also, Northrop Grumman Corp (NOC), which makes unmanned planes, the B-2 bomber and electronic equipment, also reported higher-than-expected earnings and revenues. While the company’s adjusted earnings of $2.40 per share surpassed the Zacks Consensus Estimate of $2.15 by 11.6%, revenues beat our forecast of $5,809 million by 0.7%.

However, the company reported a 4.2% year-over-year drop in its quarterly revenues. Lower volume from unmanned and space programs as well as from combat avionics and navigation and maritime systems programs were some of the reasons behind the sales decline (see Aerospace and Defense ETF Investing 101).

Pentagon’s prime contractor, Lockheed (LMT) also came up with bright results amid the uncertain budget environment. Though the company missed our revenue estimate of $10,834 million by a small 1.7% margin, it reported quarterly earnings of $2.87 per share, beating our estimates by a margin of roughly 14%. Moreover, the company reported a 27.6% jump in earnings from the year-ago quarter.

Also, United Technologies Corp. (UTX) reported better-than-expected results beating our estimates on both earnings and revenues. Though the company’s profits fell 5% year over year, an improved 2014 guidance helped cheer investors.  Sales in 2014 are expected to be $64 billion. The company increased the low end of its earnings guidance from $6.55–$6.85 per share to $6.65 to $6.85 per share.

Given these encouraging results and promising outlook, the above mentioned companies could see a boost in their share prices.

Also, Zacks Industry Rank for aerospace/defense is within the top 15% bracket, suggesting bright prospects for this industry going ahead.

In tandem, aerospace and defense ETFs having exposure to the above companies could see gains in the coming days. Thus investors keen on riding the gains can consider the ETFs discussed below (see all Industrials ETFs here).

ETFs to Play this Sector

PowerShares Aerospace & Defense Portfolio (NYSEARCA:PPA)

PPA is based on the SPADE Defense Index that tracks companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security and aerospace operations.

The product has managed to garner $98.8 million in assets so far, which are currently invested in 51 securities. It charges 66 basis points in expenses and pays out dividends at a yield of 1.2%.

Boeing, United Technologies, Lockheed and Northrop together occupy 24.25% of total fund assets.

PPA currently is a Zacks Rank #2 (Buy) ETF.

iShares U.S. Aerospace & Defense ETF (NYSEARCA:ITA)

With an asset base of $385.9 million, ITA is the largest player in this space. It charges an annual fee of 45 basis points per year while the dividend yield stands at 1.07%.

The fund holds 38 securities in its basket with United Technologies (9.7%), Boeing (8.9%) and Lockheed Martin (6.2%) holding the top three spots. Aerospace takes about 54% of the asset base while defense accounts for 43%.

ITA is a Zacks Rank #1 (Strong Buy) ETF.

SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR)

The product tracks the S&P Aerospace and Defense Select Industry index, having an asset base of $50.8 million so far. It holds 36 securities, charges 35 basis points in expenses and has a decent dividend yield of 1.22% currently. Spirit AeroSystems Holdings, Alliant Techsystems and United Technologies are the top three holdings.

XAR is a Zacks Rank #1 (Strong Buy) ETF.

This article is brought to you courtesy of Zacks.com


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