Losing Altitude: Boeing Shares Skid Into Q4 Earnings on 737 MAX Timing Delay

Boeing limps into Q4 earnings season with 737 MAX delays extended, aircraft deliveries down, and financial results seen falling sharply compared with a year ago.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Turbines: Boeing prepares to report Q4 earnings
5 min read
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Key Takeaways

  • Boeing shares slip ahead of earnings as 737 MAX timetable pushed back
  • Key question for BA could be when will MAX production start again
  • Company hoping U.S. trade deal with China can boost business there

Entering Q4 earnings a year ago, Boeing (BA) appeared to be flying high. Its stock was in healthy shape and so were its aircraft deliveries. Shares climbed toward $400 and seemed to wing to new peaks every day. True, there was some concern about a crash the previous year of one of its 737 MAX planes, but investors weren’t aware of any major issue.

A year later, BA limps into Q4 earnings season with shares on the defensive. Commercial aircraft deliveries in 2019 fell to 2005 levels and caused the company to lose major ground against its one big competitor. Production of the 737 MAX halted earlier this month about 10 months after the plane got grounded following a second crash last March.

BA’s Jan. 21 statement that it doesn’t expect the U.S. government to approve the MAX for a return to service until midyear didn’t help shares, either, because it means another busy travel season will start with airlines scrambling. No company wants to anger its customers, but airlines’ patience with BA was already growing thin.

Analysts expect BA’s Q4 financial results this coming Wednesday morning to look pretty dismal vs. a year ago. In fact, comparisons don’t get much tougher for any company this quarter.

For BA investors, the 737 MAX troubles—which analysts estimate have cost the company around $10 billion so far—started to feel more painful this month as the stock fell from around $330 where it had been camping out for a while to within a stone’s throw of $300 by Jan. 23. The MAX production halt really hit hard, raising a question we might hear on the earnings call: When will output start again? It’s unclear if BA executives will have an answer.

The recent announcement of a new CEO, Dave Calhoun, might be reassuring, though. Sometimes fresh leadership in a crisis can give investors hope that a company is ready to change directions. The media reported that departed CEO Dennis Muilenburg hadn’t been able to patch up BA’s damaged relationships with regulators. Calhoun dealt with regulatory issues as chairman of the board of Caterpillar (CAT), and has longstanding ties with the aviation industry.

That might sound promising, but it doesn’t matter much if BA can’t get things right with the MAX. The company’s earnings call might shed some new light on the production halt situation and more. Calhoun told the media last week, “We’ve got to get that line started up again...and the supply chain will be reinvigorated even before that,” CNBC reported. 

Those words indicated to some that Calhoun apparently envisions getting production started before government approval to fly the plane. We’ll have to wait and see, and also perhaps get more timing details on the earnings call.

FIGURE 1: JANUARY FREEZE. Shares of Boeing (BA) held on pretty well most of the last several months following the 737 MAX grounding, the chart above shows. However they started losing altitude in January as 737 MAX production halted and the company said government approval wouldn’t likely come until mid-year. Data source: NYSE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Never Assume

What analysts and investors probably want to know more about is how and when BA can get the MAX flying again. Unfortunately, if you’re hoping for predictions, you might be disappointed.

Muilenburg got a reputation for making promises he couldn’t keep about when the plane would come back. This frustrated analysts and investors, and also might have annoyed the Federal Aviation Administration (FAA). Last month, before Muilenburg’s announced exit, the FAA sent an email to Congress basically saying the agency was in the driver’s seat and would take all the time it needs to make sure the MAX is safe to fly. So don’t expect the new CEO to get under the regulator’s skin by making any predictions next Wednesday.

If you want an idea of when the MAX might fly again, it could make more sense to ask BA’s customers. For instance, American Airlines (AAL) said in a press release last week that it expects to resume service with the airplane on June 4. Even that conservative-sounding timetable got called into question by BA’s Jan. 21 announcement projecting FAA approval by mid-2020.

AAL said earlier in the month that it has reached a confidential agreement with BA on compensation for financial damages incurred in 2019 due to the grounding. It’s unclear whether BA’s earnings will eventually take a hit from agreements like this with AAL and other customers.

This issue goes way beyond just BA and airline companies, as news hit earlier this month of major supplier Spirit Aerosystems (SPR) planning to lay off 2,800 employees. BA is such a huge company that this production halt could conceivably hurt overall demand for products like steel and aluminum, maybe pressuring the economy as a whole. In fact, Treasury Secretary Steven Mnuchin said recently that BA’s struggles could contribute measurably to slowing U.S. economic growth. Other suppliers like General Electric (GE) could also suffer.

A Check of the Order and Delivery Numbers

Investors already know delivery numbers took a big hit last year. Let’s look at the damage. In 2019, BA handed over 380 aircraft, including military versions of its jetliners—a 14-year-low that compares with a record 863 deliveries by European rival Airbus SE—The Wall Street Journal reported. Boeing delivered 806 planes in 2018, a high for the company. It had originally forecast deliveries of 895 to 905 new planes in 2019.

BA last year brought in new orders for 246 commercial jets of all types, its lowest tally before cancellations and model swaps since 2003. On the positive side, BA delivered a record 45 787s in Q4, a surprisingly strong figure that some analysts think could add more than $1 billion to anticipated sales numbers.

BA’s quarterly delivery press release no longer includes comparisons vs. a year earlier. But if you go back to the previous year’s release, the difference looks dramatic. For instance, in Q4 2019, BA delivered nine 737s, down from 173 in the same quarter a year earlier. Total commercial airliner deliveries reached 79 in Q4, down from 238 the same quarter in 2018.

Things look a little better in the aircraft maker’s Defense, Space & Security. Deliveries there rose significantly in Q4 from a year earlier.

Glancing back at Q3, BA reported earnings per share of $1.45, well below the $2.09 Wall Street consensus. Earnings fell more than 50% from a year earlier. Revenue of $19.98 billion was a bit better than the consensus view of $19.67 billion.

BA suspended its full-year forecast earlier last year, so one question going into Q4 earnings is whether BA will provide any guidance for 2020. It seems unlikely considering the halted MAX production and uncertain timetable of getting it back to service.

Can China Demand Rebound with Deal?

BA points out that its commercial airliner business isn’t just under pressure from the headline-dominating MAX issue. It’s also a victim of declining demand from China, a key customer. Now a phase one trade deal between the U.S. and China could start to provide more traction for BA and other major industrial companies—perhaps.

The last Chinese order for a BA jet happened way back in November 2017, well before the MAX issue surfaced, the Seattle Times recently reported. In October, as a direct result of the China freeze, Boeing’s then-CEO Muilenburg announced a production rate cut for the 787 Dreamliner from 14 to 12 jets per month was planned for the end of 2020.

There might be some light at the end of that particular tunnel for BA. Wording of the phase one trade agreement requires China to import at least $32.9 billion more in U.S. manufactured goods than in 2017. In 2021, the deal requires at least $44.8 billion more Chinese spending on manufactured goods than in 2017. The quickest way for China to rack up those big numbers is to order Boeing’s expensive aircraft, the Seattle Times pointed out.

For now, that’s just speculation, but if you’re a BA investor, you’ll probably welcome any kind of positive speculation at this point. There’s really no way to know exactly what China’s central government-directed economy will do.

Analysts on BA’s call might have questions about the trade deal’s potential impact, though it’s probably too early for BA executives to have a lot of meaty information. Calhoun did issue a statement last week saying he welcomed the deal.

Boeing Earnings and Options Activity

When BA releases results, it's expected to report adjusted EPS of $1.51, vs. $5.48 in the prior-year quarter, on revenue of $21.7 billion, according to third-party consensus analyst estimates. That revenue would represent a 23% drop  from a year ago.

The options market is implying about a 3.3%  stock move in either direction around the upcoming earnings release. Implied volatility was at the 44th percentile as of Thursday afternoon. 

Looking at the Jan 31 weekly expiration, put volume has light overall, but highest at the 310 and 315 strikes. Calls have seen a bit more activity, with concentration at the 320 and 330 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.

Good Trading,

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Key Takeaways

  • Boeing shares slip ahead of earnings as 737 MAX timetable pushed back
  • Key question for BA could be when will MAX production start again
  • Company hoping U.S. trade deal with China can boost business there

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