737 MAX Program Seen Under Microscope As Boeing Earnings Approach

Major defense and aircraft makers step into spotlight this week as Lockheed Martin (LMT) reports Tuesday and Boeing (BA) reports Wednesday.

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There’s an elephant in the room—an elephant arguably the size of a 737 MAX airliner—as Boeing (BA) prepares to report Q1 earnings this coming Wednesday morning.

Investors could be on the edge of their seats waiting for Boeing to provide more clarity on aircraft orders and production after the crashes of two aircraft in the last six months put the MAX program under close scrutiny.

Boeing shares, which peaked above $440 a month ago, are down about 14% over the last month. Though the stock fell after the Ethiopian Airlines crash in March, it’s not been to the level many had expected. Meanwhile, the entire fleet of more than 370 MAX aircraft is grounded and some airlines are talking about cancelling future orders. That means investors could have a lot of questions for BA on how that might affect the company’s financial picture the rest of 2019.

Maybe the biggest thing to consider trying to take away from earnings is how these cancellations have affected BA’s order flow. Do they expect more cancellations, or can they turn things around relatively quickly? What are their future order expectations?

It’s arguably even more complicated than just the financial impact. Even if BA gets the aircraft into commercial service again sometime this year, it could face pushback from airlines that might be hesitant to put the plane back in their rotations and from passengers who might not be eager to fly on it. BA executives could be asked to address these issues, along with updates on a fix to the airplane.

In a preview of how the earnings call might sound, Boeing Chief Executive Dennis Muilenburg acknowledged recently that Boeing held some blame for the crashes and that it has relationships to repair, The Wall Street Journal reported. “We know every person who steps aboard one of our airplanes places their trust in us,” Muilenburg said. “We’ll do everything possible to earn and re-earn that trust and confidence from our airline customers and the flying public in the weeks and months ahead.”

Trust is a big issue for companies looking to keep customers and shareholders, and it looks like BA has its work cut out for it to rebuild those relationships. On the plus side, the company has a long, successful history, and aircraft safety in general has probably never been higher—at least when it comes to major crashes. BA also has a huge customer network that’s relatively reliant on its planes, and few major competitors. It’s going to be interesting to see how the jet-maker navigates the turbulent road ahead.

In contrast, Lockheed Martin (LMT), which reports Tuesday morning, could seem relatively calm. More on that below.

Figure 1: RALLY OFF: Boeing shares (candlestick) were on a roll the first two months of the year as they climbed to all-time highs. The second crash of a 737 MAX jet in March put a quick end to the rally, as this year-to-date chart shows. Meanwhile, Lockheed shares (purple line) also eased in March but found new life in April. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Boeing Earnings and Options Activity

Back in early Q1, before the second crash involving a BA jet, BA looked quite healthy from a business standpoint. After its first-ever $100 billion revenue year in 2018, the company forecast 2019 earnings per share of between $19.90 and $20.10.

It also said its commercial airplanes business delivered a record 806 aircraft last year and forecast deliveries to climb to 895 to 905 in 2019. It said revenue from commercial airplanes would total between $64.5 billion and $65.5 billion this year. Those are probably the key numbers to watch in the company’s updated guidance, especially considering that in last quarter’s call, BA said it expected the 737 MAX to account for approximately 90% of total 737 deliveries in 2019.

All of that is up in the air now, so to speak, considering the MAX is expected to account for about one-third of BA’s revenue over the next five years, according to MarketWatch. The 737 program is by far the company’s biggest commercial airline program, and earlier this month BA said  that by mid-April it will “temporarily” cut the 737 production rate to 42 planes a month from 52 planes to account for the ongoing halt in 737 Max deliveries. That will allow the company “to focus on software certification and returning the Max to flight,” Boeing said in a statement.

Even if the fix ultimately receives Federal Aviation Administration (FAA) approval, that doesn’t necessarily mean BA is out of the woods. Just last week, American Airlines (AAL), said it’s extending cancellations of the 737 MAX through Aug. 19.

How will BA rebuild confidence? That’s something investors might want to consider listening for in the company’s conference call.

When BA releases results, it is expected to report adjusted EPS of $3.23, down from $3.64 in the prior-year quarter, on revenue of $23.51 billion, according to third-party consensus analyst estimates. That revenue would represent 0.6% growth from a year ago.

Looking for a moment past the 737 MAX issue, earlier this month, the company reported 149 deliveries of commercial aircraft in Q1. That was in line with reduced analyst expectations, but reflected a nearly 50% drop in 737 deliveries from Q4.

In total, BA’s 149 deliveries in Q1 were down from 238 in Q4 and 184 in Q1 a year earlier. The 737 delivery total of 89 in Q1 represented a 49% drop from Q4 deliveries of 173, and was down from 132 a year earlier. Deliveries of other commercial craft also fell. Total orders fell to 95 aircraft in the first quarter, a drop from 180 a year earlier.

The options market is implying about a 4% ($15.50) stock move in either direction around the upcoming earnings release. Implied volatility was at the 30th percentile as of Thursday morning.

Looking at the April 26 weekly expiration, call volume has been concentrated at the 380 and 385 strikes, while put volume has been heaviest at the 360 and 355 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.

Lockheed Earnings and Options Activity

Considering all the drama at Boeing, earnings from Lockheed Martin (LMT) might get a bit lost in the shuffle when the company reports early Tuesday. Overall, it’s been a tough 12 months for aerospace and defense stocks, and LMT hasn’t been immune. Though the stock is up year-to-date, it’s down year-over-year.

Growth in aeronautics related to increased deliveries of the F-35—which has seen strong funding from the U.S. government—as well as from increases in missile systems and space systems could give LMT a boost this year, research firm CFRA said in a recent report. Something to potentially listen for in the earnings call is any color executives might provide on the new atmosphere so far in Washington, D.C., now that Democrats control the House. This development has some investors concerned about possible defense budget constraints, CFRA noted.

A couple other factors to consider include whether the recent strong dollar is having an impact on foreign demand for LMT products, and whether business is seeing any impact from the U.S./China tariff situation.

Lockheed Martin is expected to report adjusted EPS of $4.34, up from $4.02 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $12.52 billion, up 7.6% from a year ago.

The options market is implying about a 3.5% ($10.80) stock move in either direction around the coming earnings release. Implied volatility was at the 19th percentile as of Thursday morning.

Looking at the April 26 weekly expiration, there hasn’t been much put volume, and call volume has been light but most active at the 312.50 and 315 strikes.

Good Trading,



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