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Will 737 Max Issue Hamper Boeing's (BA) Earnings in Q2?

Zacks Equity Research

The Boeing Company BA is set to release second-quarter 2019 results on Jul 24, before the opening bell. Production cut and lower delivery volumes for the company’s 737 Max product line are expected to impact the bottom line in the to-be-reported quarter.

In the last reported quarter, the company delivered a positive earnings surprise of 7.35%.

Let's take a detailed look at the factors influencing Boeing’s performance in the second quarter.

737 Max Aircraft: Major Growth Inhibitor

The grounding of Boeing’s 737 Max fleet globally this March and the events that followed are expected to persistently weigh on the aircraft giant’s upcoming results. Indeed, once considered a key catalyst to the company’s top line, Boeing’s 737 Max jets have now become a major concern.

At the onset of the second quarter, Boeing announced its decision to lower the production of the 737 Max jets from 52 to 42 aircraft per month, starting mid-April. In late June, Federal Aviation Administration (FAA) identified another potential safety issue with these jets, which further delayed its return to service. Moreover, some big airlines cancelled their orders for 737 Max, while a few have pushed back the delivery.

Such production cuts and lower delivery volumes have made analysts skeptical about Boeing’s performance in the current reporting cycle and they have expressed that skepticism by lowering the bottom-line expectations for the quarter to be reported. Evidently, the Zacks Consensus Estimate for the company’s second-quarter earnings moved 20% south over the past 90 days to $1.89. The estimate also implies a massive 43.2% decline from the year-earlier reported figure.

The Boeing Company Price and EPS Surprise

The Boeing Company Price and EPS Surprise


The Boeing Company price-eps-surprise | The Boeing Company Quote

Lower Deliveries to Hurt Revenues

Boeing’s second-quarter deliveries reflected a 53.6% year-over-year decline in commercial shipments. Meanwhile, defense shipments surged 131.3% from the year-ago figure.

Such increased defense deliveries must have provided a boost to the company’s revenue growth in the second quarter. Moreover, we may expect its service revenues to reflect solid numbers in the upcoming quarterly results as the Global Services segment continues to win new business. In the first quarter, this unit expanded its global distribution of hardware and chemical products through a long-term agreement with Dubai-based Joramco.

While Boeing’s commercial aircraft business contributes almost 52% to its total revenues, the defense and global services units together accounts for 49%, still lagging the commercial unit. Therefore, no doubt lower 737 deliveries will keep the company’s overall top line under pressure in the quarter to be reported. The Zacks Consensus Estimate for the company’s total revenues in the second quarter is pegged at $20.3 billion, suggesting a 16.5% decline from the prior-year reported number.

Cash Flow to Take a Hit

Lower delivery payments due to fewer 737 deliveries combined with building and storing 737 aircraft are expected to weigh on Boeing’s operating cash in the to-be-reported quarter. This is likely to get reflected in the company’s second-quarter balance sheet.

What the Zacks Model Unveils

Our proven model shows that Boeing is likely to beat on earnings in second-quarter 2019. A stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Boeing has an Earnings ESP of +2.72% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Other Stocks That Warrant a Look

Here are some companies in the Zacks Aerospace sector that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Lockheed Martin LMT is scheduled to report second-quarter 2019 results on Jul 23. The company has an Earnings ESP of +0.14% and a Zacks Rank #1.

Moog Inc. MOG.A is expected to report third-quarter fiscal 2019 results on Jul 26. The company has an Earnings ESP of +0.76% and a Zacks Rank #3.

Recent Defense Release

Textron Inc. TXT reported second-quarter 2019 earnings from continuing operations of 93 cents per share, which surpassed the Zacks Consensus Estimate of 85 cents by 9.4%.

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