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Boeing (BA) Likely to Top Q2 Earnings Despite KC-46 Costs - Analyst Blog

Zacks Equity Research
Updated

Aerospace and defense major The Boeing Co. BA is set to release its second-quarter 2015 results before the opening bell on Jul 22. In the preceding quarter, Boeing delivered a positive 8.84% earnings surprise. Moreover, the company surpassed the Zacks Consensus Estimate in all of the past four quarters with an average beat of 12.35%. Let’s see how things are shaping up prior to this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Boeing is likely to beat earnings this season because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to beat estimates, and Boeing has the right mix.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +0.94%. This is because the Most Accurate estimate is at $2.16 while the Zacks Consensus Estimate is pegged lower at $2.14. This is a meaningful indicator of a likely positive earnings surprise.

Zacks Rank: Boeing currently carries a Zacks Rank #2.

The company’s Zacks Rank #2 and positive ESP make us reasonably confident of an earnings beat.

Note that stocks with Zacks Ranks #1, 2 or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

What is Driving the Better-than-Expected Earnings?

This aerospace behemoth has had a much better 2015 so far compared with the previous year, when the stock faltered on the bourses. The company reported strong second-quarter as well as first-half 2015 delivery numbers. Its first half deliveries increased 11.4% year over year beating its archrival Airbus. Boeing’s total deliveries in the second quarter jumped approximately 11% year over year with commercial shipments rising 8.8%.

The company’s new 737 Max model has drawn much interest while the 787 Dreamliner continues to do well. Boeing has booked 331 net new orders so far this year.

However, Boeing’s vital project suffered a significant blow as the company recently unveiled a post-tax charge that it will take on its second-quarter earnings for problems related to its $35 billion tanker program for the U.S. Air Force. The charge reflects higher engineering and manufacturing costs to complete the development, certification and initial production of the KC-46 tanker. The company however reassured that its outlook for revenue and cash flow for the year would remain unchanged.

The company will digest a post-tax charge of $536 million, or 77 cents per share, in its second-quarter results. This follows a $272 million post-tax charge related to the KC-46 program incurred in the second quarter of 2014. Yet, the company is committed to make initial deliveries of 18 tankers by Aug 2017. Boeing is scheduled to complete delivery of all 179 aircraft by 2027. The company believes that the market for refueling planes is at a staggering $80 billion over the long term.

Boeing’s 787 Dreamliner's increased deferred cost should not come as a shock either. But it will be interesting to see to what extent the company will be able to manage to restrict the cash drain per aircraft.

Stocks that Warrant a Look

Here are some other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

L-3 Communications Holdings Inc. LLL with an Earnings ESP of +1.74% and a Zacks Rank #2. It is expected to report its second-quarter results on Jul 30.

Raytheon Co. RTN with an Earnings ESP of +1.83% and a Zacks Rank #3. The company will report its quarterly result on Jul 23.

General Dynamics Corp. GD with an Earnings ESP of +0.49% and a Zacks Rank #2. It will report its quarterly result on Jul 29.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
BOEING CO (BA): Free Stock Analysis Report
 
RAYTHEON CO (RTN): Free Stock Analysis Report
 
GENL DYNAMICS (GD): Free Stock Analysis Report
 
L-3 COMM HLDGS (LLL): Free Stock Analysis Report
 
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