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Aerospace & Defense ETFs Gain Despite Mixed Q2 Earnings

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The impact of the coronavirus outbreak can be seen on economic health, with the airlines being the worst-hit sector. The virus spread has dampened air travel plans amid travel restrictions imposed by the government. Airlines’ top lines have suffered a material impact as passenger revenues form the largest component of their total revenue base. However, with reopening of global economies and resuming business activities, the sector might get support from increased travel demand.

Meanwhile, the second half of 2020 is expected to face the brunt of the pandemic as the outbreak continues to aggravate in the United States. Per the International Air Transport Association (IATA), recovery in traffic has been slower in this period than expected as global passenger traffic will not return to pre-crisis levels until 2024, a year later than expected. However, the Trump administration is supporting the proposal for another $25 billion in federal aid to protect jobs in the sector. It is worth noting here that the previous $25-billion rescue package under the Coronavirus Aid, Relief and Economic Security (CARES) Act would preserve airline jobs through Sep 30.

The pandemic has largely impacted operations of major players in the defense sector as well. Some defense manufacturers had either shut down production or are operating with a constricted workforce. Moreover, deliveries of finished products were largely affected by travel restrictions and social-distancing measures.

Earnings in Focus

On Jul 21, Lockheed Martin (LMT - Free Report) reported second-quarter 2020 adjusted earnings of $6.13 per share, beating estimates by 7.4% and revenues of $16.22 billion surpassed estimates by roughly 6.4%. The numbers improved from earnings and revenues of $5 and $14.43 billion, respectively, a year ago.

Also, the company’s cash and cash equivalents totaled $2.86 billion as of Jun 28, 2020, compared with $1.51 billion at the end of 2019.

For 2020, Lockheed Martin has updated its financial guidance. The company currently expects revenues of $63.50-$65 billion versus the prior range of $62.25-$64 billion. Earnings per share are currently projected in the band of $23.75-$24.05 for 2020 compared with the earlier range of $23.65-$23.95. 

On Jul 28, Raytheon Technologies (RTX - Free Report) reported second-quarter 2020 adjusted earnings of 40 cents per share, beating the Zacks Consensus Estimate of 10 cents. However, the bottom line slid from 67.7% from the year-ago quarter’s $1.24. Revenues came in at $14.06 billion, down 24.1% year over year. However, the metric surpassed the consensus estimate of $13.98 billion.

Raytheon Technologies ended the second quarter with cash and cash equivalents of $6.98 billion, up from $4.94 billion as of Dec 31, 2019.

On Jul 29, Boeing (BA - Free Report)  reported second-quarter 2020 adjusted loss of $4.79 per share, comparing favorably with the year-ago quarter’s loss of $5.82 per share. However, the metric was wider than the Zacks Consensus Estimate of a loss of $2.93. Including one-time items, the company incurred GAAP loss of $4.20 per share compared with loss of $5.21 witnessed in the second quarter of 2019.

The company reported $11.81 billion in revenues, missing the Zacks Consensus Estimate of $12.61 billion by 6.3%. The top line declined 25% from the year-ago quarter’s $15.75 billion.

Boeing exited the second quarter with cash and cash equivalents of $20 billion and short-term and other investments of $12.44 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 Jul 29, General Dynamics (GD - Free Report) reported second-quarter 2020 earnings from continuing operations of $2.18 per share, outpacing the Zacks Consensus Estimate of $2.14 by 1.9%. Revenues came in at $9.26 billion, beating the consensus estimate of $9.11 billion but, declining from the year-ago quarter’s $9.56 billion.

As of Jun 28, 2020, General Dynamics’ cash and cash equivalents were $2.30 billion compared with $902 million as on Dec 31, 2019.

On Jul 30, Northrop Grumman (NOC - Free Report) reported earnings per share of $6.01, beating the Zacks Consensus Estimate of $5.36 by 12.1% in the second quarter of 2020. Moreover, the bottom line surged 19% from $5.06 in the year-ago quarter. Revenues of $8.88 billion outpaced the consensus estimate of $8.59 billion.

It’s cash and cash equivalents as of Jun 30, 2020, were $4.18 billion, up from $2.25 billion as of Dec 31, 2019.

Northrop Grumman raised its 2020 financial guidance and expects to generate revenues of $35.3-$35.6 billion. The company has also lifted its full-year earnings expectations from $21.80-$22.20 to $22.00-$22.40 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 - Free Report)

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 32 securities in its basket, the in-focus five firms account for a combined 52.9% share of the fund. The fund has AUM of $3.01 billion and expense ratio of 0.42%. The fund has gained 5.7% since Jul 20 (as of Aug 13). 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 - Free Report)

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 31 holdings with the above-mentioned five companies having nearly 18.8% weight. It has AUM of $1.34 billion and an expense ratio of 0.35%. The fund has gained 7.6% since Jul 20 (as of Aug 13). It currently has a Zacks ETF Rank of #2 (Buy), with a Medium-risk outlook (read: Top-Ranked Beaten Down ETFs to Buy Now).

Invesco Aerospace & Defense ETF (PPA - Free Report)

The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. It has AUM of $704.3 million and an expense ratio of 0.59%. It comprises 53 holdings and the in-focus five firms hold 32.6%. The fund has gained 7.1% since Jul 20 (as of Aug 13). It currently has a Zacks ETF Rank #2, with a Medium-risk outlook.

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