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ETFs in Focus on Aerospace and Defense Earnings

The earnings season is off to a flying start with equity markets scaling record highs owing to a slew of upbeat economic data, strong corporate performance and President Donald Trump's tax reform proposal. The performance has been quite impressive for Aerospace and Defense companies, with major players beating market estimates (read: GOP Nears Tax Reform: Buy These ETFs).


Boeing Company BA, United Technologies UTX, Northrop Grumman NOC and General Dynamics GD beat earnings estimates, while Lockheed Martin Corporation LMT missed. However, the revenue performance was a mixed bag.


Given the escalating geopolitical risks involving North Korea, demand for defense products is increasing. Moreover, increased tensions involving Iraq and Iran are adding to the geopolitical risks. These factors are a positive for this industry and make investments in this sector an attractive option (read: Trump Widens North Korea Sanctions: ETFs in Focus).


Earnings in Focus


Boeing Company reported third-quarter 2017 adjusted earnings of $2.72 per share, surpassing the Zacks Consensus Estimate of $2.65 and decreasing from $3.51 in the year-ago quarter. The company also beat the consensus estimate on the revenue front. The company reported $24.309 billion in revenues in the quarter under review, surpassing the Zacks Consensus Estimate of $24.062 billion and increasing 1.7% from $23.898 billion a year ago.


GAAP EPS guidance for 2017 was raised to the range of $11.2-$11.4 from $11.1-$11.3 previously. Its shares price decreased 2.9% at market close on Oct 25, 2017, primarily due to a decline in revenues in its commercial airplanes and defense, space, and security segments.


United Technologies reported third-quarter adjusted earnings per share of $1.73, surpassing the Zacks Consensus Estimate of $1.68 and decreasing 1.7% from $1.76 in the year-ago quarter. The company reported $15.062 billion in revenues in third quarter, surpassing the Zacks Consensus Estimate of $14.886 billion and increasing roughly 4.9% from $14.354 billion in the year-ago quarter.


Non-GAAP EPS guidance for 2017 was raised to the range of $6.58-$6.63 from the previous guidance of $6.45-$6.60. Its share price was up initially on Oct 24, 2017, owing to the better-than-expected results but closed around 0.9% lower at market close on Oct 24, 2017.


General Dynamics
reported third-quarter adjusted earnings of $2.52, beating the Zacks Consensus Estimate of $2.43 and increasing approximately 1.6% from $2.48 in the year-ago quarter. However, revenues failed to beat the Zacks Consensus Estimate. The company reported $7.580 billion in revenues in the third quarter, missing the consensus estimate of $7.893 billion and decreasing 2% from $7.731 billion a year ago.


Non-GAAP EPS guidance for 2017 was raised to the range of $9.75-$9.80 from the previous guidance of $9.70-$9.75. Its shares closed 2.3% lower at market close on Oct 25, 2017, primarily due to the revenue miss.


Northrop Grumman reported third-quarter adjusted earnings of $3.68 per share, surpassing the Zacks Consensus Estimate of $2.92 and increasing 21.9% from $3.02 in the year-ago quarter. It also beat the Zacks Consensus Estimate on the revenue front. The company reported $6.527 billion in revenues in the third quarter, beating the consensus estimate of $6.316 billion, and increasing roughly 6.1% from $6.155 billion in the year-ago quarter.


Non-GAAP EPS guidance for 2017 was raised to the range of $12.9-$13.1 from the previous guidance range of $12.1-$12.4. Its shares closed 3.7% higher at market close on Oct 25, 2017.


Lockheed Martin
reported third-quarter adjusted earnings of $3.24 per share, missing the Zacks Consensus Estimate of $3.25 and declining roughly 10.2% from $3.61 in the year-ago quarter. Moreover, revenues also missed the Zacks Consensus Estimate. The company reported revenues of $12.169 billion in the third quarter, missing the consensus estimate of $12.827 billion, but increasing roughly 5.4% from $11.551 billion a year ago.


Its share price closed roughly 2.4% lower at market close on Oct 24, 2017, primarily due to the revenue miss.


We will now discuss a few ETFs with high exposure to the companies discussed.


iShares U.S. Aerospace & Defense ETF ITA


This fund seeks to provide an exposure to the Aerospace and Defense industry. It has AUM of $4.6 billion and charges a fee of 44 basis points a year. The fund has 10.4% exposure to Boeing, 8.0% to United Technologies, 7.3% to Lockheed Martin, 6.5% to General Dynamics, and 6.1% to Northrop Grumman (as of Oct 24, 2017). The fund has returned 44.0% in a year and 29.8% year to date (as of Oct 25, 2017). It currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.


SPDR S&P Aerospace & Defense ETF XAR


This fund has AUM of $1.0 billion and charges a fee of 35 basis points a year. The fund has 3.9% exposure to Boeing, 3.9% to Northrop Grumman, 3.8% to General Dynamics, 3.8% to United Technologies and 3.6% to Lockheed Martin (as of Oct 24, 2017). The fund has returned 44.7% in a year and 29.5% year to date (as of Oct 25, 2017). It currently has a Zacks ETF Rank #1 with a Medium risk outlook.


PowerShares Aerospace & Defense Portfolio ETF PPA


This fund has AUM of $829.6 million and charges a fee of 61 basis points a year. The fund has 6.9% to Boeing, 6.9% exposure to United Technologies, 6.7% to Lockheed Martin, 6.6% to General Dynamics and 5.3% to Northrop Grumman (as of Oct 24, 2017). The fund has returned 39.9% in a year and 26.6% year to date (as of Oct 25, 2017). It currently has a Zacks ETF Rank #1 with a Medium risk outlook.


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Northrop Grumman Corporation (NOC): Free Stock Analysis Report
 
Boeing Company (The) (BA): Free Stock Analysis Report
 
General Dynamics Corporation (GD): Free Stock Analysis Report
 
Lockheed Martin Corporation (LMT): Free Stock Analysis Report
 
United Technologies Corporation (UTX): Free Stock Analysis Report
 
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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