3 ETFs To Buy On Encouraging Aerospace & Defense Earnings

Aerospace and defense ETFs registered healthy returns over the past couple of days following upbeat third quarter earnings performance from the industry behemoths. The overall earnings picture also remained encouraging when compared to the past few quarters. Companies on the S&P 500 index are on track to register earnings growth for the first time in the last six quarters, according to our recently released Earnings Trends article.

The article also revealed that the aerospace and defense industry is currently poised to end the third quarter earnings season with the highest year-on-year earnings growth among all other broader sectors. Out of the total S&P 500 companies from the space that reported earnings as of Oct 26 71.4% of them able to beat on earnings. These companies came up with year-on-year earnings growth of 20.2%.

Elevated geopolitical tensions, which include significant increases in threats from the Islamic State of Iraq and Syria (ISIS), and urgencies showed by major economies including the U.S. to put a stop to terrorism, have been instrumental in boosting growth of this sector in the recent times. A substantial increase in defense budget also indicates growing demand for defense products. Moreover, enhanced spending in several key areas, including cybersecurity, electronic warfare and crucial U.S. satellites have also boosted this sector. Separately, demand for more fuel-efficient aircraft, a growing international market and increasing application of unmanned aircraft in warfare today also helped the sector to register healthy gains (read: Should You Buy Aerospace & Defense ETFs Now?).

Now let’s have a detailed look into the third quarter earnings performances of some of the major companies in the space.

Aerospace & Defense Earnings in Detail

Shares of aerospace giant, The Boeing Company (NYSE:BA) gained 4.7% on Wednesday after reporting better-than-expected third quarter earnings. The company delivered third-quarter 2016 adjusted earnings of $3.51 per share, surpassing the Zacks Consensus Estimate of $2.62. It also surged 39.3% from the year-ago period. Impressive execution of production programs and services, favorable tax items and timing of aircraft deliveries primarily boosted Boeing’s performance during the quarter.

The company reported revenues of $23.90 billion, which came in higher than the Zacks Consensus Estimate of $23.46 billion. However, revenues declined 7.5% on a year-over-year basis. Meanwhile, the company provided an encouraging outlook for 2016. It now expects adjusted earnings per share and GAAP earnings per share between $6.80 and $7.00 (earlier projection was between $6.10 and $6.30), and in the range of $7.10–$7.30 (earlier projection was between $6.40 and $6.60), respectively. It also expects revenues for 2016 to come in between $93.5 billion and $95.5 billion, compared with the earlier guidance of $93−$95 billion.

Shares of Northrop Grumman Corporation (NYSE:NOC) rose 3.9% yesterday after it announced third quarter adjusted earnings per share of $3.02, outpacing the Zacks Consensus Estimate by 7.5%. Earnings were also 25.3% higher than the year-ago quarter’s level. Its total revenue of $6,155 million also came in higher than the Zacks Consensus Estimate of $5,981 million and increased 2.9% year over year. The company now expects revenues to come between $23.9 billion and $24.1 billion this year, compared with its earlier projection of $23.5 –$24.0 billion. Earnings per share in 2016 are currently anticipated to be of $11.55–$11.75, compared with the prior projection of $10.75–$11.00 (read: Upbeat Aerospace & Defense Earnings Boost ETFs).

Lockheed Martin Corporation (NYSE:LMT) posted third quarter earnings per share of $3.61, which was significantly higher than the Zacks Consensus Estimate of $2.86 and jumped 49.2% year on year. Its total revenue surged 14.8% from the year-ago period to $11.55 billion, beating the Zacks Consensus Estimate of $11.38 billion. The company also lifted its revenue guidance for 2016 from $45−$46.2 billion to $46.5 billion. Moreover, it now predicts earnings per shares of $12.10 for 2016, compared with its earlier guidance of $11.15–$11.45.

Meanwhile, United Technologies Corporation (NYSE:UTX) declared third-quarter adjusted continuing operations income of $1.76 per share, beating the Zacks Consensus Estimate of $1.68 and increasing 5.4% year over year. Though missing the Zacks Consensus Estimate of $14.40 billion, third quarter revenues saw a year-on-year improvement of 4.1% to $14.35 billion. The company now expects adjusted earnings to be in the range of $6.55–$6.60 per share (prior guidance: $6.45 to $6.60) on revenues of $57–$58 billion.

However, shares of General Dynamics Corporation (NYSE:GD) declined 1% on Wednesday after reporting third quarter total revenue of $7,731 million, which missed the Zacks Consensus Estimate of $7,905 million and decreased 3.3% year over year. Despite the revenue miss, the company reported a year-on-year increase of 8.8% in third quarter earnings from continuing operations to $2.48 per share, which also beat the Zacks Consensus Estimate of $2.37 (read: ETF Strategies for Q4).

ETFs to Buy

Given the encouraging earnings performances of the industry behemoths during the third quarter, we have highlighted three favorably ranked aerospace and defense ETFs, investing in which may boost one’s portfolio returns in the near-future.

iShares US Aerospace & Defense (HN:ITA)

The fund, tracking the Dow Jones U.S. Select Aerospace & Defense Index, holds 38 securities in its basket with Boeing, United Technologies, Lockheed Martin, General Dynamics and Northrop Grumman being among the top 10 stocks. All of them together account for nearly 39% of the fund assets. With an asset base of nearly $911.8 million, the fund trades in impressive volumes of roughly 550,000 shares a day and charges an annual fee of 44 bps per year. The fund returned 1.9% in the last 2 days (as of October 26, 2016) and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Prepare for a Clinton Presidency with These Stocks & ETFs).

PowerShares Aerospace & Defense ETF (V:PPA)

PPA follows the SPADE Defense Index, with 51 companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security and aerospace operations. Boeing, Lockheed Martin, United Technologies, General Dynamics and Northrop Grumman are among the top 10 holdings and together occupy more than one third of the total fund assets. The product has managed to garner nearly $279.2 million in assets so far and trades in an average volume of 48,000 shares per day. It charges 50 bps in annual fees and gained 1.7% in the last 2 days. It currently carries a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

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

XAR tracks the S&P Aerospace and Defense Select Industry index, holding a basket of 35 stocks. United Technologies, Northrop Grumman, Lockheed Martin, General Dynamics and Boeing score among the top 10 holdings. This product has attracted an AUM of nearly $216.7 million and exchanges around 16,000 shares in hand per day. It charges 35 bps in fees per year and gained 1.8% in the past 2 days. The fund has a Zacks ETF Rank #2 with a Medium risk outlook.

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