The Q2 earnings season so far has been quite reassuring and
there is a notable improvement in the overall earnings picture. As
of the end of last week, 229 S&P 500 companies, accounting for
58.1% of the index's total market capitalization, have already
The real improvement came in from the growth and guidance front.
The growth rates are better than prior quarters with more companies
coming ahead of estimates and there is also some progress on
Top Ranked Defense Stocks and ETFs Ready to Explode
Total earnings for these companies are up 9.8% on 5.4% higher
revenues, with 69.4% beating EPS estimates and 63.8% coming ahead
of revenue estimates.
Aerospace & Defense, a relatively smaller sector within the
S&P 500, has come out with a series of estimate beating
results. Growing commercial opportunities on the heels of an
improving global economy, a pick-up in defense spending in some
countries and technological innovation and acquisitions have
actually made up for the military budget cuts.
Strong performance in the commercial aerospace sector is being
driven by growing demand for passenger air travel worldwide.
Moreover, mounting tensions in Eastern Europe could act as a
catalyst and spur Western countries to boost their spending on
This industry currently has a
Zacks Industry Rank in the top 13%
and it is seeing some strong fundamental factors underpinning its
lofty position too.
Below we have highlighted in greater detail the earnings of some of
the aerospace and defense companies.
Solid Quarterly Results
) came out with excellent results beating the estimates on earnings
buoyed by strong commercial aircraft deliveries and
production. Though it missed on the revenue part, the company
raised both the low-end and upper-end of its 2014 adjusted earnings
The company, however, booked some charges related to its KC-46A
Tanker program which has impacted its margins during the last
quarter. Also, concerns as to whether the company might overrun its
total cost on its program have kept the share prices soft following
the earnings announcement.
Nonetheless the company received new orders and its backlog also
remains strong. The company expects strong global demand for
commercial airplanes over the next two decades.
United Technologies Corp
) beat the Zacks Consensus Estimate for earnings as well as
revenues and also boosted its guidance for the rest of the year.
The company is also increasing shareholder value through its stock
At the same time, the company's declining free cash flow due to
rising capital expenditure is a matter of concern for analysts and
investors. Still, the company has as of now solid free cash which
gives us assurance that it has the ability to increase shareholder
value through growing dividends and buybacks.
A top defense contractor,
Lockheed Martin Corp.
), also beat our estimates on both fronts and boosted its earnings
guidance range for 2014. Also, the company continues to
generate strong cash from operations while maintaining its cash
General Dynamics Corporation
) beat the Zacks Consensus Estimate for earnings and also witnessed
a sharp rise in its order backlog (read:
A Comprehensive Guide to Aerospace & Defense
Northrop Grumman Corporation
) though missing on the bottom line raised both the top-end and
bottom-end of its earnings guidance range for this year.
Top Aerospace and Defense ETFs to Play this Sector
For investors who want to play the broad sector in order to capture
the impressive trend, there are a few aerospace and defense ETFs
available. Below, we have highlighted some of the key points
regarding these funds for investors seeking to make a basket play
on the space:
iShares U.S. Aerospace & Defense ETF
With an asset base of $425.9 million, ITA is the largest player in
this space. The fund trades in moderate volumes of roughly 69,000
shares a day and charges an annual fee of 44 basis points per year.
The fund holds 38 securities in its basket with United Technologies
being the top stock. BA, UTX, LMT, GD and NOC combined make up more
than a third of the fund. Aerospace takes about 53% of the asset
base while defense accounts for 44%.
The fund pays a decent dividend yield of 1.54% and is a Zacks ETF
Rank #1 (Strong Buy) fund (read:
2 Hot Summer ETFs Surging to #1 Ranks
SPDR S&P Aerospace & Defense ETF
XAR tracks the S&P Aerospace and Defense Select Industry index,
which is a modified equal weighted index, holding a basket of three
dozen stocks. This product has attracted an AUM of $58.7 million
and charges 35 basis points in expenses.
The above five stocks make up a combined 18.5% of the total fund
holdings, with Northrop Grumman occupying the top spot. The fund
has a dividend yield of 1.77% and has a Zacks ETF Rank #1 or Strong
PowerShares Aerospace & Defense Portfolio
PPA is based on the SPADE Defense Index that tracks companies
involved in the development, manufacturing, operations and support
of U.S. defense, homeland security and aerospace operations.
The product has managed to garner $135.7 million in assets so far,
which are currently invested in 53 securities. It charges 66 basis
points in expenses and pays out dividends at a yield of 0.98%.
Boeing, United Technologies, Lockheed, General Dynamic and
Northrop together occupy 29% of total fund assets.
PPA currently is a Zacks ETF Rank #2 (Buy) fund (read:
Top ETF Picks for Q2 Earnings Season
The Aerospace and Defense space has been a laggard this year due to
concerns over lofty valuations, defense budget cuts and on cost
overrun related to delayed deliveries.
However, the industry still has its solid fundamentals intact,
which of course has been reflected in the slew of earnings beating
results from some of the giants in the space. Moreover, these
companies have raised their guidance indicating that the space has
bright prospects going forward. It also has a solid Zacks Industry
Rank, further underscoring its potential.
Investors should therefore use this sluggishness in the space to
accumulate the above mentioned top ranked ETFs to play the
otherwise bullish US Aerospace and Defense industry.
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BOEING CO (BA): Free Stock Analysis Report
UTD TECHS CORP (UTX): Free Stock Analysis
ISHARS-US AEROS (ITA): ETF Research Reports
SPDR-SP AER&DEF (XAR): ETF Research Reports
PWRSH-AERO&DEF (PPA): ETF Research Reports
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