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Total earnings for these companies are up 6.5% on 5.1% higher revenues, with 71.8% beating EPS estimates and 53.7% coming in ahead of revenue estimates. In comparison to the previous quarters, the earnings growth rate is lower for this quarter, while the revenue growth rate is on the higher side. Moreover, as in the preceding quarters, the majority of companies that have been providing guidance have guided lower.
Still, Aerospace & Defense, a relatively smaller sector within the S&P 500, has come out with a series of estimate beating results. Though defense contractors have witnessed lower revenues due to a slowdown in federal spending, the picture was overall reassuring, particularly on the guidance front.
Escalating geo-political tensions in the Middle East and Ukraine have been a blessing in disguise and a long-term positive for the defense companies. Moreover, growing commercial opportunities, and a pick-up in defense spending in a number of developing countries and technological innovation and acquisitions have actually made up for the military budget cuts.
Strong performance in the commercial aerospace sector has been due to fleet renewals by many major airlines and rising demand in international markets (read: Aerospace & Defense ETFs in focus on rising Geopolitical Risks).
Below we have highlighted in greater detail the earnings of some of the major aerospace and defense companies which really drive this sector's outlook:
Solid Quarterly Results
Aerospace giant The Boeing Company (BA) delivered upbeat third-quarter 2014 results beating the Zacks Consensus Estimate for earnings as well as revenues led by higher commercial aircraft deliveries. The company reported adjusted third-quarter 2014 earnings of $2.14 per share, beating our estimates by 9.2%. Revenues rose 7.5% year over year to $23.8 billion in the reported quarter, surpassing the Zacks Consensus Estimate of $23 billion.
Moreover, the company raised its adjusted earnings per share forecast for 2014 to $8.10 to $8.30 a share from its earlier view of $7.90-$8.10/share.
United Technologies Corp (UTX) reported mixed results, beating the Zacks Consensus Estimate for earnings, while missing on revenues. The company, however, reiterated its guidance for the rest of the year. Adjusted earnings per share came in at $1.82 per share, beating our estimates by a penny. Total revenue for the third quarter increased 5% year over year to $16,168 million, missing the Zacks Consensus Estimate of $16,228 million.
Pentagon's No. 1 weapon supplier, Lockheed Martin Corp. (LMT), also posted forecast-beating earnings in spite of lower-than-expected revenues in the third quarter. The company revised its 2014 revenue and earnings guidance to the higher end of its previous projections. However, Lockheed expects 2015 revenues to decrease by a low single-digit percentage range over 2014.
General Dynamics Corporation (GD) also swept past the Zacks Consensus Estimate for both earnings and revenues. The company has also raised its 2014 earnings forecast by 25 cents a share on the expectation of a modest increase in revenue, higher operating earnings in three of the company's four divisions and on a lower tax rate (read: A Comprehensive Guide to Aerospace & Defense ETFs).
Northrop Grumman Corporation (NOC) reported third-quarter 2014 adjusted earnings of $2.32 per share, beating the Zacks Consensus Estimate of $2.16 by 7.4%. Though quarterly revenues decreased nearly 2.0% year over year to $5.98 billion, it surpassed the estimate by 1.8%. The company has also increased its earnings outlook.
Top Aerospace and Defense ETFs to Play this Sector
Though the sector has been a laggard this year due to concerns over lofty valuations, defense budget cuts and on cost overrun related to delayed deliveries, it still has its solid fundamentals intact.
Most of the companies in the space have seen a surge in share prices post the solid Q3 earnings and improved outlook (read: Strong Industrial Stock Earnings Put These ETFs in Focus).
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 (ITA)
With an asset base of $348.2 million, ITA is the largest player in this space. The fund trades in moderate volumes of roughly 50,000 shares a day and charges an annual fee of 43 basis points per year.
The fund holds 38 securities in its basket with United Technologies being the top stock with 8.5% allocation. BA, LMT, GD and NOC combined make up more than one-fourth of the fund. Aerospace takes about 52% of the asset base while defense accounts for the rest. The fund has a decent dividend yield of 1.33% and is a Zacks ETF Rank #2 (Buy) fund (see all Industrials ETFs here).
PowerShares Aerospace & Defense Portfolio (PPA)
PPA 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 $152.5 million in assets so far, which are currently invested in 52 securities.
Lockheed, Boeing, United Technologies, General Dynamic and Northrop are among the top 10 holdings and together occupy 30% of total fund assets. It charges 66 basis points in expenses and currently has a Zacks ETF Rank #2.
SPDR S&P Aerospace & Defense ETF (XAR)
XAR tracks the S&P Aerospace and Defense Select Industry index, holding a basket of three dozen stocks. This product has attracted an AUM of $60 million and charges 35 basis points in expenses.
General Dynamics, Lockheed Martin and Northrop Grumman score among the top 10 holdings. The fund has a dividend yield of 1.20% and has a Zacks ETF Rank #2.
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BOEING CO (NYSE: BA): Free Stock Analysis Report
UTD TECHS CORP (NYSE: UTX): Free Stock Analysis Report
LOCKHEED MARTIN (NYSE: LMT): Free Stock Analysis Report
ISHARS-US AEROS (ETF:ITA): ETF Research Reports
PWRSH-AERO&DEF (ETF:PPA): ETF Research Reports
SPDR-SP AER&DEF (ETF:XAR): ETF Research Reports
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