Lockheed And Boeing Earnings: Questions On China Trade, Defense Demand

Whether it’s fair or not, shares of a few major U.S. multinational companies are often seen as bellwethers for the progress of U.S./China trade negotiations. Boeing Co BA—which reports Q4 earnings before the market open on Wednesday and counts China among its major customers—is arguably one of them.

Before BA reports, its defense industry competitor, Lockheed Martin Corporation LMT, is scheduled to release Q4 earnings Tuesday ahead the open. Like BA, LMT is a major multinational doing business around the globe. 

BA’s commercial aircraft business has been facing some questions amid signs of slowing global economic growth, while both companies wrestle with how their defense businesses might be affected by a change in political power in Washington, D.C., after Democrats won back the House.

Another potentially looming issue investors might want to get clarity on is executives’ thoughts on how their business might be affected if trade talks with China don’t progress. That outcome might bring increased tariffs on the steel and aluminum both companies depend on to build their products.

In addition, the recent shutdown of parts of the U.S. government ground some gears to a halt, and though the shutdown has been temporarily halted, a deal on border security has yet to be agreed upon. While the Department of Defense is fully funded for the year, it’s possible it might have to stretch some of its resources if any currently earmarked funds are shifted from the Pentagon to the border. Whether this would have any impact on BA and LMT is unclear.

Boeing: Strong Demand for Air Travel 

When BA releases results, it is expected to report adjusted EPS of $4.58, down from $4.80 in the prior-year quarter, on revenue of $26.95 billion, according to third-party consensus analyst estimates. Revenue is expected to grow about 6.2% year-over-year.

BA had a solid Q3, helped by a strong defense business and efficiencies in its commercial airliner production. Earlier this month, the company reported record-setting commercial jet deliveries in Q4. BA said it has continued to see “strong demand for air travel across the globe.” The company—which typically reports deliveries and orders ahead of earnings—said it delivered a record 806 planes in 2018, surpassing its previous record of 763 deliveries in 2017. 

BA has continued to build the 787 Dreamliner at the highest production rate for a twin-aisle airplane to support high demand. The Dreamliner program finished with 145 deliveries for the year, BA said.

BA said it received 287 orders for its aircraft during the final quarter of the year, up from 189 during Q3. The 737 and the 787 made up a bulk of the new demand, with customers placing orders for 248 of the former and 25 of the latter.

While the delivery figures might provide investors some insight into the business, final prices can vary widely from one plane to the next. In Q3 2018, BA reported that the commercial airplane division generated $15.28 billion in revenue from 190 deliveries.

The Wall Street Journal reported last week that U.S. domestic flights were 83.5% full in November, down from a record 86.3% in July. Some carriers have also pushed back delivery dates for jets ordered from Boeing and other aircraft companies because they have enough capacity, the paper reported.

So far this quarter, there have been some surprisingly positive earnings and optimism from major airlines. In their earnings calls, none of the airlines have been mentioning any worries about tariffs or crude oil prices. 

Looking beyond the commercial airplane business, the two other Boeing business segments are defense, space and security, and global services. Both of these divisions have been growing at a double-digit pace in recent quarters. In Q3 2018, defense, space and security revenue increased 13% year over year to $5.73 billion. And global services revenue increased 14% to $4.09 billion.

Options traders have priced in an approximately 3.6% (about $12.98) stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform from TD Ameritrade. Implied volatility was at the 36th percentile as of this morning. Weekly call options have been active at the 370 and 375 strikes, and put activity has been concentrated at the 350 and 360 strikes.

Figure 1: BRIEF MAYDAY MOMENT? Shares of Boeing (BA - candlestick) were pulled down in late 2018 with the broader market, as shown by the S&P 500 Index (SPX - purple line), but have since recovered somewhat. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Lockheed Martin: Shifting Political Winds? 

Lockheed Martin is expected to report adjusted EPS of $4.40, up from a loss of $2.25 in the prior-year quarter, on revenue of $13.72 billion, according to third-party consensus analyst estimates. Analysts have indicated that they expect revenue to be down about 9.3% year-over-year.

The company’s shares had a tough 2018, falling 18%. A lot of the slide happened in Q4 along with the rest of the market, but LMT faced issues beyond the general collapse that quarter. The November election brought a change in control as Democrats won the House of Representatives to take power there for the first time in eight years. That has perhaps raised some questions about whether LMT could count on a rapidly growing U.S. defense budget in the next few years.

One potential concern is that with a divided U.S. government, compromises might be made that could bring back spending caps to the Defense budget, as seen earlier this decade. The Budget Control Act of 2011 set limits on defense spending as part of a plan to keep budget deficits under control. The idea then was to reduce annual budget deficits by at least $2.1 trillion over 10 years, with approximately half of the savings coming from defense. Both parties in Washington have called over the years for the Defense Department to find ways to save money.

Options traders have priced in an approximately 3.3% ($9.52) stock move in either direction around the coming earnings release, according to the Market Maker Move indicator on the thinkorswim platform. Implied volatility was at the 46th percentile as of this morning. 

Trading activity has been light in recent sessions, but activity has been higher in the 275-strike puts and the 290-strike calls.

Figure 2: LMT SHARES LAGGING. Shares of Lockheed Martin (LMT - candlestick) have lagged the benchmark S&P 500 Index (SPX - purple line), partly due to concerns about possible changes in defense spending priorities. 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.

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