Abnormal Production Costs to Hurt Boeing (BA) Q3 Earnings

Zacks Equity Research
·5-min read

Dismal commercial delivery figures along with rising production and storage costs are expected to have weighed on The Boeing Company’s BA commercial business in the third quarter. The coronavirus pandemic impact is also likely to have hurt the unit’s performance.

Scheduled for release on Oct 28, Boeing’s third-quarter 2020 results are likely to reflect these factors.

Click here to know how the company’s overall Q3 performance is expected to have been.

737 Max Remains a Growth Inhibitor

Boeing’s 737 Max program has been dragging down the jet giant’s operational performance since its grounding in last March. Since the Federal Aviation Administration is yet to give the green signal for this jetliner’s flight, majority of the airlines have either cancelled scheduled delivery of 737 Max or postponed the same.

Therefore, despite lower rate production of these jets having started around the end of May 2020, the third quarter witnessed a notable plunge of 40% in 737 deliveries when compared to the year-ago quarter.

The Boeing Company Price and EPS Surprise

The Boeing Company Price and EPS Surprise
The Boeing Company Price and EPS Surprise

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

With Boeing starting production of this aircraft, cost is bound to increase, whereas lack of notable deliveries means dearth of profit. On the other hand, there are already more than 400 completed 737 aircraft stored in warehouses, for which the company has been bearing storage costs.

Consequently, the aforementioned factors related to the 737 debacle are expected to have weighed on Boeing’s commercial business segment performance in the soon-to-be-reported quarter.

COVID-19 Continues to Hurt

Boeing’s third-quarter deliveries reflected a massive 108.1% year-over-year plunge in commercial shipments. In particular, the aircraft giant could deliver only 28 airplanes in the soon-to-be-reported quarter, primarily due to dismal 787 Dreamliner jet and 767 deliveries as well as lower deliveries of 737. This dragged down overall commercial delivery figures.

Such lower delivery volumes can be primarily attributed to the impacts of the coronavirus pandemic, apart from 737.  Notably, the novel coronavirus outbreak forced majority of nations to impose strict travel ban since the middle of the first quarter. As air traffic slowed sharply, new aircraft, which were supposed to get delivered, are now lying idle at Boeing's manufacturing plants.

Meanwhile, quality flaws in 787 Dreamliner might have partially hampered the delivery flow of this product line during the quarter, after a manufacturing problem affecting the horizontal stabilizer on 787 was detected.

Such poor delivery figures must have hurt commercial revenues and pushed up the company’s expenses for storage, thus dragging down its commercial unit’s earnings.

Abnormal Production Cost Woes

In light of the ongoing crisis situation, Boeing decided to reduce the production rates of several of its commercial airplane programs. As the company continues to produce at abnormally low production rates, it expects to incur approximately $5 billion of abnormal production costs, of which it has already incurred $1.5 billion as of Jun 30, 2020. We expect the company to have incurred similar notable abnormal production cost in the third quarter as well, which may have hurt its earnings from commercial business.

What the Zacks Model Unveils

According to the Zacks model, a company needs the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings surprise.

Boeing has an Earnings ESP of +9.58% and a Zacks Rank #4 (Sell). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are some defense companies you may want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases:

L3Harris Technologies LHX has an Earnings ESP of +0.57% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kratos Defense KTOS has an Earnings ESP of +33.33% and a Zacks Rank of 3.

A Recent Defense Release

Lockheed Martin LMT reported third-quarter 2020 earnings from continuing operations of $6.25 per share, which surpassed the Zacks Consensus Estimate of $6.07 by 3%. The bottom line also improved 10.4% from the year-ago quarter’s $5.66.  

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