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4 Reasons Behind the Strength of Aerospace & Defense ETFs
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Aerospace & Defense ETFs like iShares U.S. Aerospace & Defense ETF (ITA - Free Report) and Invesco Aerospace & Defense ETF (PPA - Free Report) have hit 52-week highs lately. Though the broader market has been outperforming the defense sector this year, the sector still holds strength and has the potential to march higher in the coming days.
Below, we highlight a few factors that are acting as tailwinds for the Aerospace & Defense sector.
Continued Geopolitical Tension & Increase in Defense Budget
The ongoing Russia-Ukraine war and some other parts of the world are facing geopolitical tensions in one form or other. China’s defense budget for 2023 will grow by 7.2%, marking a straight eighth consecutive year increase. The growth marked the fastest clip since 2019. India is also planning to boost defense spending by 13% with billions to be invested for new weapons.
The United States shells out more on national defense than China, India, Russia, United Kingdom, Saudi Arabia, Germany, France, Japan, and South Korea — combined. U.S. defense spending makes up more than 10% of all federal spending and nearly half of discretionary spending.
Rising M&A Activity for Aerospace
Per HigherGov, there was solid acquisition activity in 2022 despite economic headwinds and rising rates. There were 433 Aerospace, Defense, and Government (ADG) transactions in 2022, the second largest number of transactions ever, down 10% from record 2021. The Defense Products and Services sector experienced a 12% uptick in transactions, fueled by defense spending in the United States and Europe to counter expanding nation-state threats. Continued geopolitical threats, robust company cashflows, and continued investment in critical technologies will likely fuel ADG transaction volumes in 2023 too.
Comeback of Boeing
One of the strong pillars of the sector was Boeing, which had long been struggling with one crisis or another. First, its 737-Max aircraft met with serial accidents and then COVID-19-led slowdown in the airlines sector led Boeing to face difficulties in the past few years. But Boeing’s business has turned around of late.
Boeing expects to hire 10,000 workers in 2023 as it recovers from the pandemic-induced and 737-Max-related crisis. The aircraft-maker plans to increase jetliner production, but will cut some support jobs, the U.S. plane maker said recently, as quoted on CNBC.
The company plans to increase deliveries of the 737 MAX from the 374 aircraft in 2022 to between 400 to 450 planes this year, with deliveries of the 787 expected to hit between 70 and 80 aircraft. This earnings season, Boeing reported its first positive free cash flow since 2018. The company reiterated it expects to generate $3 billion to $5 billion in free cash flow in 2023.
Cheaper Valuation
Even after beating the S&P 500 last year, the sector has cheaper valuation with a forward P/E of 17.91X against the S&P 500’s P/E of 17.94X. The sector’s price-to-book and price-to-sales ratios are 2.50X and 1.69X, respectively. Both data stand cheaper against the S&P 500’s data of 5.00X and 2.63X, respectively.
The sector’s projected EPS growth is 10.77% versus the S&P 500’s EPS growth of 4.89%. Most importantly, the sector has a decent cash cushion that helps it ride out the turbulent macroeconomic times. The sector has a cash flow per share ratio at 14.52X.
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4 Reasons Behind the Strength of Aerospace & Defense ETFs
Aerospace & Defense ETFs like iShares U.S. Aerospace & Defense ETF (ITA - Free Report) and Invesco Aerospace & Defense ETF (PPA - Free Report) have hit 52-week highs lately. Though the broader market has been outperforming the defense sector this year, the sector still holds strength and has the potential to march higher in the coming days.
Below, we highlight a few factors that are acting as tailwinds for the Aerospace & Defense sector.
Continued Geopolitical Tension & Increase in Defense Budget
The ongoing Russia-Ukraine war and some other parts of the world are facing geopolitical tensions in one form or other. China’s defense budget for 2023 will grow by 7.2%, marking a straight eighth consecutive year increase. The growth marked the fastest clip since 2019. India is also planning to boost defense spending by 13% with billions to be invested for new weapons.
The United States shells out more on national defense than China, India, Russia, United Kingdom, Saudi Arabia, Germany, France, Japan, and South Korea — combined. U.S. defense spending makes up more than 10% of all federal spending and nearly half of discretionary spending.
Rising M&A Activity for Aerospace
Per HigherGov, there was solid acquisition activity in 2022 despite economic headwinds and rising rates. There were 433 Aerospace, Defense, and Government (ADG) transactions in 2022, the second largest number of transactions ever, down 10% from record 2021. The Defense Products and Services sector experienced a 12% uptick in transactions, fueled by defense spending in the United States and Europe to counter expanding nation-state threats. Continued geopolitical threats, robust company cashflows, and continued investment in critical technologies will likely fuel ADG transaction volumes in 2023 too.
Comeback of Boeing
One of the strong pillars of the sector was Boeing, which had long been struggling with one crisis or another. First, its 737-Max aircraft met with serial accidents and then COVID-19-led slowdown in the airlines sector led Boeing to face difficulties in the past few years. But Boeing’s business has turned around of late.
Boeing expects to hire 10,000 workers in 2023 as it recovers from the pandemic-induced and 737-Max-related crisis. The aircraft-maker plans to increase jetliner production, but will cut some support jobs, the U.S. plane maker said recently, as quoted on CNBC.
The company plans to increase deliveries of the 737 MAX from the 374 aircraft in 2022 to between 400 to 450 planes this year, with deliveries of the 787 expected to hit between 70 and 80 aircraft. This earnings season, Boeing reported its first positive free cash flow since 2018. The company reiterated it expects to generate $3 billion to $5 billion in free cash flow in 2023.
Cheaper Valuation
Even after beating the S&P 500 last year, the sector has cheaper valuation with a forward P/E of 17.91X against the S&P 500’s P/E of 17.94X. The sector’s price-to-book and price-to-sales ratios are 2.50X and 1.69X, respectively. Both data stand cheaper against the S&P 500’s data of 5.00X and 2.63X, respectively.
The sector’s projected EPS growth is 10.77% versus the S&P 500’s EPS growth of 4.89%. Most importantly, the sector has a decent cash cushion that helps it ride out the turbulent macroeconomic times. The sector has a cash flow per share ratio at 14.52X.