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Can Aerospace & Defense ETFs Gain Despite Mixed Q1 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. In fact, with the pandemic showing almost no signs of waning, air travel demand is likely to remain stressed, at least in the near term.

Meanwhile, U.S. passenger airlines agreed in principle to a $25-billion rescue package under the Coronavirus Aid, Relief and Economic Security (CARES) Act per the U.S. Treasury Department on Apr 14. According to the deal, major carriers will receive 70% of the funds in cash that need not be paid back. But the rest 30% of the economic stimulus needs to be repaid. Moreover, airlines have taken various cost-cutting measures like trimming their international and domestic schedules, putting a freeze on hiring and deferring capital expenses to fight the impact of the pandemic.

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

Earnings in Focus

On Apr 29, Boeing (BA - Free Report)  reported first-quarter 2020 adjusted loss of $1.70 per share against the year-ago quarter’s earnings of $3.16 per share. This can be primarily blamed on the coronavirus outbreak and the grounding of 737 Max, which resulted in lower commercial deliveries. However, the metric was narrower than the Zacks Consensus Estimate of a loss of $2.04. Including one-time items, the company incurred GAAP loss of $1.11 per share against earnings of $3.75 in the first quarter of 2019.

The company reported $16.91 billion in revenues, missing the Zacks Consensus Estimate of $17.18 billion by 1.6%. The top line declined 26% from the year-ago quarter’s $22.92 billion on account of lower 737 deliveries and the coronavirus pandemic. Following the earnings release, the stock lost around 1.8% (as on May 11).

On May 7, Raytheon Technologies (RTX - Free Report) reported first-quarter 2020 results, which included standalone United Technologies along with Otis and Carrier. The company’s adjusted earnings of $1.78 per share beat the Zacks Consensus Estimate of $1.11. However, the bottom line declined from $1.91 in the year-ago quarter.

Revenues came in at $18.21 billion, down 0.8% year over year. The metric surpassed the consensus estimate of $18.14 billion.

Given the ongoing uncertainty regarding the scope, severity and duration of the pandemic, Raytheon Technologies did not provide any guidance. However, it is expected to revisit its 2020 view during its next earnings release. Since the earnings release, the stock has lost around 1% (as of May 11).

On Apr 29, General Dynamics (GD - Free Report) reported first-quarter 2020 earnings from continuing operations of $2.43 per share, lagging the Zacks Consensus Estimate of $2.46 by 1.2%. Revenues came in at $8.75 billion, lagging the estimated $9.28 billion and declining from the year-ago quarter’s $9.26 billion. Following the earnings release, the stock declined around 2% (as of May 11).

On Apr 29, Northrop Grumman (NOC - Free Report) reported earnings per share of $5.15, lagging the Zacks Consensus Estimate of $5.42 by 5% in the first quarter of 2020. However, the bottom line increased 1.8% from $5.06 in the year-ago quarter. Revenues of $8.62 billion outpaced the estimated $8.47 billion.

Considering the global impact of COVID-19, Northrop Grumman lowered its 2020 revenue and earnings guidance. The company currently expects to generate revenues in the range of $35.0-$35.4 billion, compared with its prior guidance of $35.3-$35.8 billion during 2020. The company’s 2020 earnings are currently expected in the range of $21.80-$22.20 per share, compared with the previous band of $22.75-$23.15. Following the earnings release, the stock lost around 5% (as of May 11).

On Apr 21, Lockheed Martin (LMT - Free Report) reported first-quarter 2020 earnings of $6.08 per share, beating estimates by 5.5% and revenues of $15.65 billion surpassed estimates by roughly 2.8%. The numbers improved from $5.99 and $14.34 billion, respectively, a year ago.

For 2020, Lockheed Martin has updated its financial guidance. The company currently expects to generate revenues of $62.25-$64 billion compared with $62.75-$64.25 billion projected earlier. Earnings per share are anticipated in the $23.65-$23.95 range for 2020. Since the earnings release, the stock has lost around 1.7% (as of May 11).

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 (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 35 securities in its basket, the in-focus five firms account for a combined 53.7% share of the fund. The fund has AUM of $2.84 billion and expense ratio of 0.42%. It has a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: 5 Sector ETFs That Gained More Than 20% Last Week).

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 34 holdings with the above-mentioned five companies having nearly 19% weight. It has AUM of $1.27 billion and an expense ratio of 0.35%. It currently has a Zacks ETF Rank of #2, with a Medium-risk outlook (read: ETFs to Gain as Wall Street Cheers US Stimulus Package).

Invesco Aerospace & Defense ETF (PPA - Free Report)

The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. It has AUM of $681.1 million and an expense ratio of 0.59%. It comprises 48 holdings and the in-focus five firms hold 36.5%. It currently has a Zacks ETF Rank #2, with a Medium-risk outlook.

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