Major defense and aircraft makers step into the spotlight this week as Lockheed Martin (LMT) reports Tuesday and Boeing (BA) reports Wednesday.
Whether it’s fair or not, shares of a few major U.S. multinational companies are often seen as bellwethers for the progress of U.S./China trade negotiations. Boeing (BA)—which reports Q4 earnings before the market open on Wednesday and counts China among its major customers—is arguably one of them.
Before BA reports, its defense industry competitor, Lockheed Martin (LMT), is scheduled to release Q4 earnings Tuesday ahead the open. Like BA, LMT is a major multinational doing business around the globe.
BA’s commercial aircraft business has been facing some questions amid signs of slowing global economic growth, while both companies wrestle with how their defense businesses might be affected by a change in political power in Washington, D.C., after Democrats won back the House.
Another potentially looming issue investors might want to get clarity on is executives’ thoughts on how their business might be affected if trade talks with China don’t progress. That outcome might bring increased tariffs on the steel and aluminum both companies depend on to build their products.
In addition, the recent shutdown of parts of the U.S. government ground some gears to a halt, and though the shutdown has been temporarily halted, a deal on border security has yet to be agreed upon. While the Department of Defense is fully funded for the year, it’s possible it might have to stretch some of its resources if any currently earmarked funds are shifted from the Pentagon to the border. Whether this would have any impact on BA and LMT is unclear.
When BA releases results, it is expected to report adjusted EPS of $4.58, down from $4.80 in the prior-year quarter, on revenue of $26.95 billion, according to third-party consensus analyst estimates. Revenue is expected to grow about 6.2% year-over-year.
BA had a solid Q3, helped by a strong defense business and efficiencies in its commercial airliner production. Earlier this month, the company reported record-setting commercial jet deliveries in Q4. BA said it has continued to see “strong demand for air travel across the globe.” The company—which typically reports deliveries and orders ahead of earnings—said it delivered a record 806 planes in 2018, surpassing its previous record of 763 deliveries in 2017.
BA has continued to build the 787 Dreamliner at the highest production rate for a twin-aisle airplane to support high demand. The Dreamliner program finished with 145 deliveries for the year, BA said.
BA said it received 287 orders for its aircraft during the final quarter of the year, up from 189 during Q3. The 737 and the 787 made up a bulk of the new demand, with customers placing orders for 248 of the former and 25 of the latter.
While the delivery figures might provide investors some insight into the business, final prices can vary widely from one plane to the next. In Q3 2018, BA reported that the commercial airplane division generated $15.28 billion in revenue from 190 deliveries.
The Wall Street Journal reported last week that U.S. domestic flights were 83.5% full in November, down from a record 86.3% in July. Some carriers have also pushed back delivery dates for jets ordered from Boeing and other aircraft companies because they have enough capacity, the paper reported.
So far this quarter, there have been some surprisingly positive earnings and optimism from major airlines. In their earnings calls, none of the airlines have been mentioning any worries about tariffs or crude oil prices.
Looking beyond the commercial airplane business, the two other Boeing business segments are defense, space and security, and global services. Both of these divisions have been growing at a double-digit pace in recent quarters. In Q3 2018, defense, space and security revenue increased 13% year over year to $5.73 billion. And global services revenue increased 14% to $4.09 billion.
Options traders have priced in an approximately 3.6% (about $12.98) stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform from TD Ameritrade. Implied volatility was at the 36th percentile as of this morning. Weekly call options have been active at the 370 and 375 strikes, and put activity has been concentrated at the 350 and 360 strikes.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.
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