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Aerospace and Defense ETFs Gain Despite Mixed Q4 Earnings

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The year 2019 was a good one for the U.S. Aerospace and Defense industry. The Dow Jones U.S. Aerospace & Defense Index  returned 16.3% in the year. Solid improvement in global air traffic boosted commercial airplane demand, providing support to the U.S. Aerospace and Defense industry. Per the projections made by the International Air Transport Association, the passenger count might double to 8.2 billion in 2037.

Meanwhile, Trump administration is proposing the fiscal 2021 budget with a goal to expand military expenditures by 0.3% to $740.5 billion. Moreover, it aims at doubling expenditures on AI from $973 million to around $2 billion by 2020. Trump’s new budget also requires to raise NASA spending from roughly $22.6 billion to $25.2 billion in fiscal 2021. The budget will also include $2-billion allocation for a southern border wall.

Earnings in Focus

On Jan 29, Boeing (BA - Free Report)  reported fourth-quarter 2019 adjusted loss of $2.33 per share against the year-ago quarter’s earnings of $5.48 per share. The downside can be primarily blamed on the 737 Max grounding, which resulted in lower commercial deliveries. The metric also compares unfavorably with the Zacks Consensus Estimate for earnings of $1.73. Excluding one-time items, the company incurred GAAP loss of $1.79 per share against earnings of $5.93 in fourth-quarter 2018.

The company reported $17.91 billion in revenues, missing the Zacks Consensus Estimate of $21.67 billion by 17.4%. The top line declined 37% from the year-ago quarter’s $28.34 billion on account of lower 737 deliveries.

Due to uncertainty related to the timing and conditions of the 737 MAX fleet’s return to service, Boeing has refrained from issuing a guidance for now. Following the earnings release, the stock gained around 6.4% (as on Feb 7).

On Jan 28, United Technologies (UTX - Free Report)  reported fourth-quarter adjusted earnings of $1.94 per share, beating the Zacks Consensus Estimate of $1.84. However, the bottom line declined from $1.95 in the year-ago period.

Revenues came in at $19.55 billion, up 8.4% year over year. The metric surpassed the consensus estimate of $19.42 billion. The year-over-year upside was led by 1% contribution from organic sales growth and 8% positive impact of acquisitions, partially offset by 1% impact of currency translation.

The company is poised to grow on the back of strength in its aerospace business, cost reduction and operational excellence initiatives. The company is on track to divide its existing businesses into three entities. The process is likely to be completed by the first half of 2020. Since the earnings release, the stock has gained around 3.8% (as on Feb 7).

On Jan 29, General Dynamics (GD - Free Report)  reported fourth-quarter 2019 earnings from continuing operations of $3.51 per share, surpassing the Zacks Consensus Estimate of $3.46 by 1.5%. Operating earnings improved 14.3% from $3.07 per share in the year-ago quarter. Revenues came in at $10.77 billion, above the estimated $10.60 billion and the year-ago quarter’s $10.38 billion. Following the earnings release, the stock gained around 1.7% (as on Feb 7).

On Jan 30, Northrop Grumman (NOC - Free Report)  reported earnings per share of $5.61, beating the Zacks Consensus Estimate of $4.78 by 17.4% in fourth quarter of 2019. Moreover, the bottom line rose 13.8% from $4.93 reported in the year-ago quarter. Revenues of $8.72 billion missed the estimated $8.82 billion.

Northrop Grumman currently expects to generate revenues of $35.3-$35.8 billion during 2020. The company expects free cash flow of $3.15-$3.45 billion in 2019. The 2020 earnings are expected to be $22.75-$23.15 per share. Following the earnings release, the stock lost around 5.6% (as on Feb 7).

On Jan 28, Lockheed Martin (LMT - Free Report) reported fourth-quarter 2019 earnings of $5.29 per share, comfortably beating estimates by 6% and revenues of $15.88 billion surpassed estimates by roughly 4%. The numbers improved from $4.39 and $14.41 billion, respectively, a year ago.

Lockheed Martin issued its financial guidance for 2020. The company expects to generate revenues of $62.75-$64.25 billion. Additionally, it estimates earnings per share of $23.65-$23.95. The company also expects to generate cash from operations of more than $7.6 billion during the year. Since the earnings release, the stock has gained around 1.6% (as on Feb 7).

Market Impact

The U.S. Aerospace and Defense ETFs with notable exposure to most of these companies seem to have benefited from the earnings releases of major players (see: all the Industrial ETFs here).

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 by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 33 securities in its basket, the in-focus five firms account for a combined 53.1% share of the fund. ITA has gained about 3.2% since Jan 28 to close at $237.35 on Feb 7. The fund has AUM of 5.81 billion and expense ratio of 0.42%. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Will Buffett's Rumored Faith Lift Boeing ETFs Despite Crashes?).

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 32 holdings with the above-mentioned five companies having nearly 19.5% weight. XAR has gained about 1.9% since Jan 28 to close at $117.16 on Feb 7. It has AUM of $2.31 billion and an expense ratio of 0.35%. It currently has a Zacks ETF Rank of #2 with a Medium risk outlook (read: S&P 500 Hits New Highs: ETFs Soaring to Start 2020).

Invesco Aerospace & Defense ETF (PPA - Free Report)

The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. It has AUM of $1.22 billion and an expense ratio of 0.59%. It comprises 50 holdings and the in-focus five firms hold 31.9%. PPA has gained about 2% since Jan 28 to close at $73.09 on Feb 7. It currently has a Zacks ETF Rank #2 with a Medium risk outlook.

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