Investor's Business Daily, March 22nd, 2007
Opponents have stepped up efforts recently to end American involvement in Iraq. But there's one arena you won't hear many complaints -- defense industry investors.
Defense contractors have seen strong profits as a result of increased defense spending since the Iraq invasion in 2003. The 2006 U.S. defense budget was $442 billion with $79 billion of that for equipment acquisitions and $70 billion for research and development. President Bush has already requested a 15% increase in defense spending in 2007. Over the next two years, analysts project the defense budget will rise an additional 4.7% annually.
Two exchange traded funds in particular have performed solidly in this hawkish atmosphere: iShares Dow Jones U.S. Aerospace Fund ITA and PowerShares Aerospace & Defense Fund PPA. IShares DJ U.S. Aerospace seeks performance corresponding to the Dow Jones U.S. Select Aerospace and Defense Index while PowerShares Aerospace and Defense tracks performance corresponding to the Space Defense Index.
Relative Strength
Both funds have an IBD Relative Strength Rating of 69. Both are near highs set before the recent correction.
The two funds also have similar holdings.
Both list the nation's 20th largest manufacturer, United Technologies UTX, as their largest holding. The difference is in the amount: Of its 33 holdings, the iShares fund has 9.23% in United Technologies. Of its 57 holdings, the PowerShares fund has 6.88%.
The Hartford, Conn.-based company makes Otis Elevators, Carrier air conditioners and fire and security systems. But it's also the parent company of Sikorsky Aircraft Corp., makers of the Black Hawk and Comanche helicopters, and aerospace systems maker Hamilton Sundstrand.
Return On Equity
Although United Technologies has an RS Rating of just 53, it has a strong return on equity of 21.8%. With military contracts topping $5 billion in 2005, the company's revenue climbed 19% last year, from $3.12 a share in 2005 to $3.71 a share in 2006.
The funds also each hold shares in aviation powerhouse Lockheed Martin LMT, which has an RS of 81. The Bethesda, Md., aeronautics maker's earnings per share rose 43% last year, from $3.85 a share in '05 to $5.51 in '06. Analysts expect earnings to rise at least another 10% this year. The company already has a backlog of $76 billion in orders.
General Dynamics GD is a top holding in each fund as well. The Falls Church, Va.-based company builds information, combat, shipbuilding and marine systems. It recently won a $144 million contract from the U.S. Marine Corps to build expeditionary fighting vehicles. It has an RS of 67.
Copyright 2007 Investor's Business Daily, Inc.
