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Aerospace and Defense ETFs Dip Despite Strong Q3 Earnings

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The U.S. aerospace industry is performing steadily with strong demand from civil and military sides. Considerable amount of R&D investments is being pulled in by the sector, with the ongoing work on new hybrid electric propulsion and full electric concepts (see: all the Industrial ETFs here)

In the period starting June 2009 till March 2017, the defense sector contracted at an annual rate of 2.1% but since April 2017, it is expanding at a rate of 2.9%. This turnaround has added nearly 0.21% to the nation’s economic growth, per Commerce Department. The economy has expanded at a 2.9% annual rate since April of 2017 (read: Top Performing ETFs of the Third Quarter).

Recently, Boeing (BA - Free Report) , United Technologies UTX, Northrop Grumman NOC, General Dynamics GD, Lockheed Martin LMT and Raytheon RTN come up their quarterly results, each topping the Zacks Consensus Estimate for earnings. The Zacks Consensus Estimate for revenues was surpassed by all except for General Dynamic.

Earnings in Focus

Boeing reported third-quarter earnings per share of $3.58, beating the Zacks Consensus Estimate of $3.45 and increasing from the year-ago quarter number of $2.72. The company reported $25.15 billion in revenues, surpassing the Zacks Consensus Estimate of $23.68 billion and the year-ago figure of $24.31 billion.

It has raised its 2018 revenue and earnings guidance. Currently, it expects 2018 revenues in the range of $98-$100 billion compared with $97-$99 billion projected earlier. The company expects adjusted or core earnings per share in the range of $14.90-$15.10 compared with $14.30-$4.50 anticipated earlier (read: ETF Strategies for the Midterm Elections).

United Technologies topped the earnings estimate by 12 cents and revenue estimate by $370 million. On a year-over-year basis, earnings per share and revenues increased from $1.73 and $15.06 billion, respectively.

The company has raised its 2018 earnings view to $7.20-$7.30 per share from the prior guidance of $7.10-$7.25 and revenue projection to $64.0-$64.5 billion from $63.5-$64.5 billion previously.

General Dynamics reported EPS of $2.89, beating the Zacks Consensus Estimate of $2.74 and improving from the year-ago earnings of $2.52. Revenues came in at $9.09 billion below the estimated $9.04 billion but above the year-ago quarter’s $7.58 billion.

Northrop Grumman reported EPS of $6.54, which beat the Zacks Consensus Estimate of $4.35 and improved 77.7% year over year. Revenues of $8.09 billion also edged past the estimated $8.00 billion and improved from $6.53 billion in the year-ago quarter.

Northrop Grumman currently expects to generate revenues of $30 billion during 2018, in line with its earlier projection and earnings per share are expected in the range of $18.75-$19 compared with the earlier view of $16.60-$16.85.

Lockheed Martin’s earnings of $5.14 per share comfortably beat the estimate by 82 cents and revenues of $14.32 billion surpassed the estimate by $1.17 billion. The numbers are up from $3.24 and $12.17 billion, respectively, in the year-ago quarter.

For 2018, Lockheed Martin has updated its financial guidance. The company currently expects to generate revenues of $53 billion compared with the prior expected range of $51.6-$53.1 billion and expects to deliver earnings per share of $17.50, higher than earlier range of $16.75-$17.05.

Raytheon came up with a positive surprise of 16% on earnings and 2% on revenues. Earnings and revenues increased 14.2% and 8.3%, respectively, from the year-ago quarter.

Raytheon has raised its full-year guidance for the top and bottom lines. The company currently expects 2018 revenues in the range of $27.0-$27.3 billion, up from $26.7-$27.2 billion projected earlier. It now expects earnings from continuing operations of around $10.01-$10.11 per share, up from the $9.77-$9.97 band.

ETFs in Focus

In spite of the strong results, the dipping markets caused iShares U.S. Aerospace & Defense ETF (ITA),SPDR S&P Aerospace & Defense ETF (XAR) and Invesco Aerospace & Defense ETF (PPA) slip in the past two trading days — the period dotted with defense releases and ended down by 0.15%, 0.17% and 0.22% respectively (as on Oct 25). Below we highlight the above mentioned ETFs:

ITA

This fund provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 38 securities in its basket, the in-focus six firms account for a combined 45% share. AUM of 5.74 billion and has an expense ratio of 0.43%. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

XAR

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 35 holdings with the above-mentioned six companies having nearly 23% weight. AUM of $1.52 billion and an expense ratio of 0.35%. It currently has a Zacks ETF Rank of #2 with a Medium risk outlook.

PPA

The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. AUM of $975.6 million and an expense ratio 0f 0.61%. It comprises 53 holdings and the in-focus six firms hold 38%. It currently has a Zacks ETF Rank #2 with a Medium risk outlook.

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