Aerospace ETFs get lift from earnings

Recent quarterly reports showing strong demand from emerging markets have boosted investor optimism in this sector.

By TheStreet Staff Oct 25, 2011 11:37AM

By Don Dion, TheStreetTheStreet


The aerospace and defense industry will be of particular interest during the middle and latter half of this heavy earnings week. Names on tap include Boeing (BA), Lockheed Martin (LMT), Raytheon (RTN), General Dynamics (GD), and Precision Castparts (PCP).


In this week's ETFs to watch, I noted that these companies represent major slices of funds such as the iShares Dow Jones U.S. Aerospace & Defense Index Fund (ITA).


The aerospace and defense industry has held up noticeably well throughout the past few months as macroeconomic concerns have ignited doubts and led many investors to question the global growth picture. While the soured mood has weighed on the broad industrials, shares of ITA have consistently outperformed the Industrial Select Sector SPDR (XLI) over the past six months. Since late April, ITA has dipped 6%. XLI, meanwhile, has fallen approximately twice that amount.


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However, XLI has had a standout performance over the past month, helping it close some of the gap. ITA, however, does not appear to be showing signs of slowing down. On the contrary, investors have already seen hints of what can be expected from this week's battery of aerospace-related earnings. So far, the results have been promising.


Last week, both Honeywell (HON) and United Technologies (UTX) were the latest companies to follow Google (GOOG) and beat earnings estimates. In addition to surpassing forecasts, the two boosted their full-year outlooks.


Despite seemingly sweeping concerns about slowing growth in emerging markets, both companies highlighted how the hardy demand from the developing world played a key role in contributing to their standout performances.


Representing nearly 9% of its assets, United Technologies is ITA's largest holding. Meanwhile, UTX and Honeywell together account for over 10% of another aerospace-related ETF, the PowerShares Aerospace & Defense Portfolio (PPA).


Can Boeing, Lockheed Martin, and others follow suit? In an earnings preview published in Barron's, RBC Capital notes that commercial aerospace will be a major factor to keep a watch on. Defense-related business, on the other hand, is forecast to be "surprise-free."

Given the preview that UTX and Honeywell have provided, it may be tempting to take on exposure to either ITA or PPA in anticipation for this week's earnings. This strategy may prove satisfying for risk tolerant, short-term-minded traders. For conservative individuals, it may be more effective to wait on the sidelines until the initial earnings-fueled excitement subsides.



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