Back to top

Image: Bigstock

Will Aerospace & Defense ETFs Shine on Mixed Q4 Earnings?

Read MoreHide Full Article

The coronavirus outbreak has dampened the U.S. economic growth with the airline being one of the worst-hit sectors. The virus’ spread resulted in declining air travel with restrictions imposed by the government. Consequently, the aviation stocks’ top lines suffered a material impact as passenger revenues account for a significant amount of their total revenue base. In fact, with the pandemic aggravating as new variants are spreading fast, air-travel demand is likely to remain sluggish, at least in the near term. Studying the stressed balance sheets of the carriers, it will be safe to say that the space is likely get a boost from the vaccine rollout and introduction of another round of fiscal stimulus.

The pandemic also impacted operations of major players in the defense sector. Some defense manufacturers had to either temporarily close production or operate with a constricted workforce. Moreover, deliveries of finished products were largely affected by travel restrictions and social-distancing measures.

Earnings in Focus

On Jan 26, Lockheed Martin (LMT - Free Report) reported fourth-quarter 2020 earnings from continuing operations of $6.38 per share, on par with the Zacks Consensus Estimate. Meanwhile, net sales of $17.03 billion surpassed estimates by roughly 0.4%. The numbers improved from the year-ago earnings and revenues of $5.29 and $15.88 billion, respectively.

Also, the company’s cash and cash equivalents totaled $3.16 billion as of Dec 31, 2020 compared with $1.51 billion at the end of 2019. 

Lockheed Martin issued its financial guidance for 2021. The company expects to generate revenues of $67.10-$68.50 billion. Furthermore, it expects to deliver earnings per share of $26-$26.30.

On Jan 26, Raytheon Technologies (RTX - Free Report) reported fourth-quarter 2020 adjusted earnings of 74 cents per share, beating the Zacks Consensus Estimate of 71 cents. However, the bottom line dropped 36.2% from the year-ago quarter’s $1.16. GAAP sales came in at $16.42 billion, up from the year-ago quarter’s $11.69 billion. Moreover, the metric surpassed the Zacks Consensus Estimate of $16.30 billion by 0.7%.

Raytheon Technologies ended the fourth quarter with cash and cash equivalents of $8.80 billion as of Dec 31, 2020, up from $4.94 billion as of Dec 31, 2019.

On Jan 27, Boeing (BA - Free Report)  reported fourth-quarter 2020 adjusted loss of $15.25 per share, significantly wider than the year-ago quarter’s loss of $2.33. Also, the metric was much wider than the Zacks Consensus Estimate of a loss of $1.78. Including one-time items, the company incurred a GAAP loss of $14.65 per share in the fourth quarter of 2020 compared with a loss of $1.79 incurred in the fourth quarter of 2019. It reported $15.30 billion in revenues, surpassing the Zacks Consensus Estimate of $15.26 billion by 0.3%. However, the top line declined 15% from the year-ago quarter’s $17.91 billion.

Boeing exited 2020 with cash and cash equivalents of $7.75 billion, and short-term and other investments of $17.84 billion. At the end of 2019, the company had $9.49 billion of cash and cash equivalents, and $0.54 billion of short-term and other investments. 

On Jan 27, General Dynamics (GD - Free Report) reported fourth-quarter 2020 earnings from continuing operations of $3.49 per share, lagging the Zacks Consensus Estimate of $3.55 by 1.7%. Additionally, revenues came in at $10.48 billion, falling shy of the consensus estimate of $10.85 billion and decreasing from the year-ago quarter’s $10.77 billion as well.

As of Dec 31, 2020, General Dynamics’ cash and cash equivalents were $2.82 billion compared with $902 million as of Dec 31, 2019.

On Jan 28, Northrop Grumman (NOC - Free Report) reported earnings per share of $6.59, outpacing the Zacks Consensus Estimate of $5.70 by 15.6% in the fourth quarter of 2020. Moreover, the bottom line rose 17.5% from $5.61 in the year-ago quarter. Revenues of $10.21 billion too outpaced the consensus estimate of $9.24 billion.

Its cash and cash equivalents as of Dec 31, 2020 were $4.91 billion, up from $2.25 billion as of Dec 31, 2019.

The company currently expects to generate revenues of $35.1-$35.5 billion during 2021. The current-year earnings are expected to be $23.15-$23.65 per share.

Market Impact

The U.S. Aerospace and Defense ETFs with notable exposure to most of the above-mentioned 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 aircrafts, and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 35 securities in its basket, the in-focus five firms account for a combined 51.4% share of the fund. The fund has an AUM of $2.76 billion and an expense ratio of 0.42%. The fund has lost 0.2% since Jan 25 (as of Feb 3). It has a Zacks ETF Rank #3 (Hold) with a Medium-risk outlook.

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 33 holdings with the above-mentioned five companies having 17.4% weight. It has an AUM of $1.30 billion and an expense ratio of 0.35%. The fund has slipped 1.6% since Jan 21 (as of Feb 3). It currently has a Zacks ETF Rank of 3 with a Medium-risk outlook (read: Defense ETFs to Gain on Teledyne's FLIR Systems Buyout Deal).

Invesco Aerospace & Defense ETF (PPA - Free Report)

The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. It has an AUM of $704.1 million and an expense ratio of 0.59%. It comprises 56 holdings and the in-focus five firms hold 30.2%. The fund has dipped 1.7% since Jan 21 (as of Feb 3). It currently has a Zacks ETF Rank #3 with a Medium-risk outlook (read: ETFs to Win on Boeing Shares Gain: Prospects Look Bright)

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free>>