Solid Earnings Results Are Driving Aerospace & Defense ETFs

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August 1, 2013 12:58pm NYSE:ITA NYSE:PPA

defense stocksSecond quarter earnings season has remained rather lackluster so far. As of the end of last week, 262 S&P 500 companies, accounting for 59.3% of the index’s total market capitalization, have already reported.

Most of the earnings growth of the S&P 500 has been driven by Finance sector earnings, which have been quiet strong though the ‘quality’ of earnings is not great.

Aerospace & Defense, a relatively smaller sector with the S&P 500, has delivered solid results for the last quarter and is current experiencing positive earnings revisions trend—with rising revisions ratios for 2013 and 2014, per Zacks Earnings Preview.

A positive earnings revisions trend has sent the industry to #4 (out of 62) on Zacks ‘M’ industry rank list as of July 27, 2013. The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks.

The impact of sequester on these companies has not been as bad as earlier feared, and international orders have been on solid growth. Further, commercial aerospace orders have been rising. As a result, investors have been pouring money into these stocks and ETFs over the past few months and the sector has significantly outperformed the broader market this year.

Excellent Quarterly Results

Some of the dominant players in the industry have reported solid second quarter results. (Read: 3 Bank ETFs leading the pack this earnings season)

Boeing (BA) raised its guidance based on higher expected volume as commercial deliveries remained strong and foreign sales of military aircraft were rising. At the same time, Boeing’s management expressed concern that most of the impact of sequestration was yet to be seen.

The company spent $1 billion on share buybacks last quarter and with $14 billion in cash and marketable securities as of the end of the second quarter on its balance sheet, the buyback activity is expected to continue in the coming months.

United Technologies (UTX) missed on the top-line but raised the low-end of its 2013 earnings guidance. During the earnings conference call the CFO said “we continue to see strong growth in the commercial aviation industry…. While we continue to see pressure in the military…the overall aerospace industry remains very healthy”.

Lockheed Martin (LMT) also beat the earnings consensus estimate and raised their revenue and earnings guidance for the full year.

Northrop Grumman (NOC) beat Zacks consensus estimate for earnings as well as revenue and improved their guidance.

ETFs to play this sector

Below we have analyzed three ETFs available to investors 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 US defense, homeland security and aerospace operations. It is the oldest product in the space PPA with an inception date of October 26, 2005.

Per sponsor’s website, sector allocations as of July 26, 2013 were Industrials (81%), Information Technology (16%) and Materials (3%).

The product has managed to garner $61.3 million in assets so far, which are currently invested in 48 securities. It charges 66 basis points in expenses and pays out dividends at an attractive yield of 2.1%.

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

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

ITA which made it debut in May 2006 is currently the largest ETF in the space with $115.4 million in assets. It charges annual fee of 47 basis points per year while the dividend yield is pretty nice at 1.8% urgently.

The fund holds 35 securities in its basket with United Technologies (9.5%), Boeing (8.3%), Precision Castparts (6.1%) and  Lockheed Martin (6.1%) being the top holdings. Aerospace takes about 55% of the asset base while Defense accounts for the rest 45%.

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

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

Launched in September 2011, this product tracks S&P Aerospace and Defense Select Industry index, which is a modified equal weight index.

This product has attracted AUM of $20.86 M so far. It holds 36 securities with weighted average market cap of $19.7 billion. It charges 35 basis points in expenses and has a decent dividend yield of 1.31% currently.

Spirit AeroSystems Holdings, Alliant Techsystems, United Technologies and Lockheed Martin are the top holdings but being modified equal weighted, the fund is pretty well diversifies with these top holdings accounting for just 18.3% of the asset base.

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

This article is brought to you courtesy of Neena Mishra From Zacks.

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