Solid Earnings Results Are Driving Aerospace & Defense ETFs

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

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