Aerospace ETFs Grounded as Budget Cuts Take a Toll
January 23rd, 2014 at 3:39pm by Tom Lydon
Federal budget cuts are beginning to make an impact on aerospace and defense stocks and exchange traded funds, with Lockheed Martin Corp. (NYSE: LMT) revealing a 14% drop in fourth-quarter profits.
Lockheed, the U.S. government’s largest contractor, saw net income from continuing operations fall to $488 million in the fourth quarter, down from $569 million in 2012, reports Jonathan D. Salant for Bloomberg.
Bruce Tanner, Lockheed’s chief financial officer, hopes that this year would be a trough in U.S. defense spending.
“We’re hopeful 2014 is the bottoming out,” Tanner said.
Lockheed’s lower fourth quarter returns attributed to special charges, including $171 million for work force reductions, and a $195 million goodwill writedown due to defense budget reductions and “related competitive pressures.”
The federal contracting market has been shrinking. U.S. government prime contracts of at least $3,000 dipped 11% to $456 billion for the year ended Sept. 30, the largest annual decline since records began in 1984,
Military contracts have fallen due to a mixture of across-the-board “sequestration” spending cuts and the slow U.S. military withdrawal from Iraq and Afghanistan, reports Robert Wright for the Financial Times.
Marillyn Hewson, chief executive officer of Lockheed, points out that the new congressional budget deal shows a “level” budget for the defense department for the next two years.
Shares of LMT fell 3.5% Thursday.
The iShares U.S. Aerospace & Defense ETF (NYSEArca: ITA), the traditional, cap-weighted spin on aerospace and defense names, also dipped 1.5% Thursday. The ETF has a 6.5% weight toward LMT, along with a 9.2% allocation toward Boeing (NYSE: BA) and 9.1% in United Technologies (NYSE: UTX). ITA is up 58.0% over the past year. [Aerospace ETF Showdown: So Good, It’s Hard to Go Wrong]
The PowerShares Aerospace and Defense Portfolio (NYSEArca: PPA) fell 1.6% Thursday. The PowerShares ETF slightly spreads out its allocations, with top holdings LMT at 6.6%, BA at 6.4% and UTX at 6.4%. PPA has gained 49.9% over the past year.
Lastly, the SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR) declined 1.3% Thursday. The fund spreads out its individual weights even further, with Textron (NYSE: TXT) as its largest holding at 4.3%, followed by Huntington Ingalls Industries (NYSE: HII) at 4.3%. Lockheed makes up 4.0% of the ETF. XAR rose 60.1% over the past year.
iShares U.S. Aerospace & Defense ETF
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.