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Earnings Preview: What Might Be Expected from LMT and BA’s Q3?

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October 23, 2017
Fighter jet on runway
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Many of the stocks with exposure to the defense industry have surged since the U.S. presidential elections last year. Some of the catalysts that have pushed shares higher include a proposed $622 billion defense budget for 2018 and ongoing geopolitical concerns, particularly in North Korea as they continue to test missiles in 2017.

This week, the biggest names in the industry report third-quarter earnings. Defense and aerospace company Lockheed Martin (LMT) reports earnings before market open on Tuesday, Oct. 24, and Boeing reports on Wednesday, Oct. 25, also before the open.

Lockheed Martin Earnings and Trading Activity

While the company operates several segments, its F-35 program has been one of the primary focuses among analysts. At 15% of the company’s sales and comprising a large portion of the company’s order book, CFRA analysts view it as its most critical program.

In the second quarter, LMT reported $5.23 billion in net sales in its aeronautics division, a 19% year-over-year increase. Management primarily attributed the growth to $525 million in higher net sales for the F-35 program as a result of increased aircraft production volume and sustainment activities.

Over the long-term, CFRA analysts have said they think LMT has a significant growth opportunity
driven by the production ramp of the F-35 program and international sales.” Several analysts have also been optimistic about the company’s space division as well as its missile defense systems, citing overseas developments in North Korea and regular missile attacks in other parts of the world.

Another part of the business outside its defense lines is focused on developing energy-generation technology. In February this year, LMT announced that Atlantis Resources had launched the first tidal energy turbine using their technology off the coast of Scotland. Since 2013, the company has had a partnership with Atlantis to “develop technology, components and projects in the tidal power sector on a global basis.”

After reporting better-than-expected earnings in the second quarter, management hiked their outlook for the full year by a small amount, saying they expect adjusted earnings per share from $12.30 to $12.60 on net sales ranging from $49.8 billion and $51 billion. That’s a bump of 15 cents to the bottom line and a $300 million increase on the top line compared to the company’s April outlook.   

Tomorrow, LMT is expected to report adjusted earnings of $3.25 per share, pretty much flat to last year’s $3.27, on net sales of $12.83 billion, according to third-party consensus analyst estimates. Revenue is expected to decrease slightly from the $12.91 billion it generated in the prior-year quarter.

Options traders have priced in about a 2.8% potential share price move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. LMT isn’t really a name that sees a whole lot of options trading; it’s a higher-priced stock that typically has limited volatility. At the October 27 expiration, there has been some activity at the 327.5-strike calls during today’s trading session and puts were all over the place.  

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 Martin and Boeing YTD Performance

FIGURE 1: LMT AND BA YTD PERFORMANCE.

The chart above shows the year-to-date performance as a percentage for Lockheed Martin (LMT) as the yellow line, Boeing (BA) as the purple line and the S&P 500 (SPX) as the teal line. 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.

Boeing Earnings and Options Trading Activity

A couple of weeks ago, BA released its third-quarter delivery results, which reflected just over a 7% year-over-year increase in delivered aircraft. The 737 was the primary source of growth, delivering 145 units of the aircraft, 25 more than the third quarter of 2016, according to the company. The company has announced plans to expand the production of the 737 to 57 units per month by 2019, bumping it up from the 47 per month it had said it would build on a monthly basis in June.

Several analysts have been cautious on the company since Airbus announced it would partner with Bombardier to produce its C Series aircraft. Several analysts have cited the planes increased fuel efficiency over the 737, saying the C Series could capture a sizable chunk of the narrow-body airplane market.

The company’s commercial division is the primary focus among analysts since it generates a majority of its revenue. In the second quarter, BA reported that revenue in its commercial airplanes declined 10% year-over-year, to $15.71 billion. Over the same timeframe, revenue in its defense, space and security segment declined 4% year-over-year, to $6.88 billion. For the full year, CFRA analysts are expecting revenues in that segment to decline 5%.

For the third quarter, BA is expected to report adjusted earnings of $2.65 per share on revenue of $24.06 billion, a slight increase from $23.9 billion reported in the prior-year quarter. Earnings are expected to drop compared to the $3.51 per share reported in the third quarter of 2016, but earnings in that quarter got a $0.98 boost due to favorable tax items.

Options traders have priced in about a 4.3% potential share price move in either direction around the upcoming earnings release, according to the Market Maker Move indicator. In short-term trading at the October 27 expiration, calls have been active at the 265 and 270 strike prices, while puts have seen the most activity at the 255 strike. At the end of trading today, the implied volatility was at the 99th percentile.

Looking Ahead

It’s a jam-packed week full of earnings releases. A lot of eyes will be on Thursday when tech giants Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Intel (INTC) report after the closing bell. The European Central Bank is also meeting that same day, which might bring some more volatility to the day’s trading. And Twitter (TWTR) also reports before the open on Thursday, Oct. 26 and the following week Facebook (FB) reports after the close on Wednesday, Nov. 1.

Good Trading,
JJ
@TDAJJKinahan

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