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4 Reasons Why Aerospace & Defense ETFs May Gain Further

Aerospace & Defense ETFs outperformed the market last year as iShares U.S. Aerospace & Defense ETF ITA and Invesco Aerospace & Defense ETF PPA delivered about 13% past year versus an 8% decline in the S&P 500. Though the broader market has been outperforming the defense sector this year, the sector still holds strength and has the potential to march higher in the coming days.

Below, we highlight a few factors that are acting as tailwinds for the Aerospace & Defense sector.

Continued Geopolitical Tension

If the ongoing Russia-Ukraine war is not enough, some other parts of the world are also facing geopolitical tensions in one form or other. Iran’s defense ministry lately said one of its factories was attacked by drones in the city of Isfahan. However, it did not mention anything about the suspect. There was a terror attack in Israel's Jerusalem on Friday night.

Rising M&A Activity for Aerospace

Per HigherGov, there was solid acquisition activity in 2022 despite economic headwinds and rising rates. There were 433 Aerospace, Defense, and Government (ADG) transactions in 2022, the second largest number of transactions ever, down 10% from record 2021. The Defense Products and Services sector experienced a 12% uptick in transactions, fueled by defense spending in the United States and Europe to counter expanding nation-state threats. Continued geopolitical threats, robust company cashflows, and continued investment in critical technologies will likely fuel ADG transaction volumes in 2023 too.

Comeback of Boeing

One of the strong pillars of the sector was Boeing, which had long been struggling with one crisis or another. First, its 737-Max aircraft met with serial accidents and then COVID-19-led slowdown in the airlines sector led Boeing to face difficulties in the past few years. But Boeing’s business has turned around of late.

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Boeing expects to hire 10,000 workers in 2023 as it recovers from the pandemic-induced and 737-Max-related crisis. The aircraft-maker plans to increase jetliner production, but will cut some support jobs, the U.S. plane maker said last week, as quoted on CNBC.

Boeing acknowledged that it will “lower staffing within some support functions,” a move meant to enable it to better align resources to support current products and technology development. It declined to comment on how many jobs it will cut in 2023.

The company plans to increase deliveries of the 737 MAX from the 374 aircraft in 2022 to between 400 to 450 planes this year, with deliveries of the 787 expected to hit between 70 and 80 aircraft.

This earnings season, Boeing reported its first positive free cash flow since 2018. The company reiterated it expects to generate $3 billion to $5 billion in free cash flow in 2023.

 

Cheaper Valuation

Even after beating the S&P 500 last year, the sector has cheaper valuation with a forward P/E of 17.01X against the S&P 500’s P/E of 17.97X. The sector’s price-to-book and price-to-sales ratios are 2.49X and 1.66X, respectively. Both data stand cheaper against the S&P 500’s data of 5.08X and 2.65X, respectively.

The sector’s projected EPS growth is 13.96% versus the S&P 500’s EPS growth of 5.81%. Most importantly, the sector has a decent cash cushion that helps it ride out the turbulent macroeconomic times. The sector has a cash flow per share ratio at 3.94X.

 

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iShares U.S. Aerospace & Defense ETF (ITA): ETF Research Reports

Invesco Aerospace & Defense ETF (PPA): ETF Research Reports

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Zacks Investment Research