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Earnings Preview: Planes and Airline Roundup

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April 25, 2017
Plane Getting Ready for Boarding
iStockphoto.com/guvendemir

Now that it seems to be a regular occurrence, traders don’t seem to be  paying too much attention to the potential government shutdown that could  occur if lawmakers can’t agree on plans to fund the federal government. Instead, more focus appears to be on global risks—even those seem like less of a focus following the latest round of French election results—and first-quarter earnings results. On the earnings front this week, airplane maker Boeing Co. (BA), American Airlines Group (AAL), and Southwest Airlines Co. (LUV) are reporting.  

Boeing (BA) Earnings: Q1 Deliveries Down

Big orders are generally indicative of demand and might be what grabs attention in the news, but deliveries are an important figure to watch because that’s what brings the money in. Earlier in the month, Boeing said its total first-quarter deliveries dropped to 169 from 176 a year ago. Deliveries for the 737 and 777 models as well as military aircraft fell, although the company did deliver two additional 787 Dreamliners.

Boeing reports first-quarter earnings before market open on April 26 with expectations for earnings of $1.91 per share on revenue of $21.44 billion, according to consensus third-party analyst estimates. Those estimates project almost a 10% rise in earnings per share on a 2.7% decline in revenue.

Boeing’s stock had a pretty nice run since the start of the year, increasing 16.94% year-to-date compared to just over a 6% gain for the S&P 500 (SPX), and hit an all-time high of $185.71 at the beginning of March. Still close to all-time highs, the options market has priced in almost a 2.5% potential stock move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading, calls at the 180 and 185 strike prices and puts at the 175 strike have been active. The implied volatility sits at the 38th percentile.

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.

Boeing Company Profile and Business Divisions

FIGURE 1: COMMERCIAL AIRPLANES AT BOEING.

Commercial Airplanes is the largest division at Boeing, but the company also generates a lot of revenue from US Defense, Space & Security Systems. TD Ameritrade clients can analyze potential revenue drivers of a stock on the Fundamentals tab on the thinkorswim® platformTrefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

AAL and LUV: Declining Earnings Ahead?

The airlines industry is also in the spotlight for its estimated earnings decline this quarter. According to FactSet, earnings for the airline companies in the SPX are expected to decline 50%, the largest year-over-year decline out of all twelve industries in the industrials sector. What might be driving the expected weakness? Delta Airlines (DAL) attributed it to higher fuel costs and foreign currency headwinds in its earnings press release earlier this month. Some analysts are expecting those same things to impact American Airlines and Southwest.

American Airlines reports first-quarter earnings before market open on April 27 with expectations for earnings of $0.57 per share on revenue of $9.62 billion, according to consensus third-party analyst estimates. Southwest also reports first-quarter earnings before market open on April 27 with expectations for earnings of $0.62 per share on revenue of $4.89 billion, according to consensus third-party analyst estimates. Revenue estimates for both are up slightly compared to the same quarter a year ago while earnings estimates are down significantly.

For American Airlines, the options market has priced in just over a 2% potential stock move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading, calls were active at the 45, 45.5 and 47 strike prices and puts were spread out across strikes. The implied volatility sits at the 14th percentile, the lower end of the range.

Looking at Southwest, the options market has priced in just under a 4.5% potential stock move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading, there hasn’t been any real pattern to trading with some activity in puts at the 55 strike price. The implied volatility sits at the 55th percentile.

YTD Airline Stock Performance Compared to SPX

FIGURE 2: MIXED PERFORMANCES.

American Airlines, charted above, underperformed the SPX (purple line) as well as peers United Airlines (gray line) and Delta Airlines (red line). Southwest (teal line) has outperformed the SPX and its peers. The percentages on the right show year-to-date performance. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

It’s a packed earnings week that finishes off with major tech companies Amazon, Alphabet, Microsoft, and Intel reporting on Thursday. They’ll set the stage for Apple’s results coming out after market close on May 2.  

Good Trading,
JJ
@TDAJJKinahan

NC
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