Will Expensive Tanker Program Mar Boeing's (BA) Q4 Earnings?

The Boeing Company’s (NYSE:BA) Defense, Space & Security segment has been witnessing solid demand for its varied product offerings. The favorable defense budget has been another key catalyst for this segment’s growth. However, rising cost for tanker program remains a major concern. We expect Boeing’s fourth-quarter 2017 results, scheduled for release on Jan 31, to duly reflect these factors.

Deliveries – A Mixed Bag

On Jan 9, 2018, Boeing announced fourth-quarter and 2017 delivery figures. In 2017 Boeing delivered 174 defense products, down from 185 a year ago. Total deliveries consisted of 68 AH-64 Apache (NYSE:APA) helicopters (both new and remanufactured) and 44 Chinook helicopters (new and renewed). The company also delivered 23 F/A-18s, 19 P-8s, 16 F-15s, one Military Satellite, and three Commercial and Civil Satellites.

In the fourth quarter Boeing dispatched 43defense products, up from the year-ago period figure of 40. Total deliveries consisted of 17 AH-64 Apache helicopters (both new and remanufactured) and 10 Chinook helicopters (new and renewed). The company also delivered five each of P-8’s, F/A-18s, P-8s, and F-15s along with one Military Satellite.

Budget Reform: A Boon

The recent budgetary reforms adopted by the Trump administration have been fueling growth for defense contractors like Boeing. The company has been witnessing notable funding support above the president's budget request for a number of programs such as F-18, CH-47 Chinook, Ground-Based Midcourse Defense, AH-64 Apache, P-8 Poseidon and others.

Inflow of orders from Pentagon as well as other U.S. allies for varied products of Boeing will get duly reflected in the yet-to-be reported quarter’s results.

Will Contract Wins be an Efficient Growth Driver?

Keeping up its trend, Boeing’s defense business won a number of multi-billion dollar contracts in the fourth quarter as well. However, a question remains as to whether such notable orders can aid the segment’s growth.

In the third quarter also such order growth has been witnessed, yet this segment’s top line suffered a plunge. Rising cost related to the company’s tanker program most probably influenced this decline.

In 2011, the U.S. Air Force awarded Boeing a deal for designing, developing, manufacturing and delivering four next generation aerial refueling tankers – KC-46A. Related to this program, Boeing has been reeling under higher cost due to changes in initial production aircraft, as it progresses through late-stage testing and the certification process.

Although the flight test airplanes are performing well under this program, the final product is expected to be delivered in 2018. So the fourth-quarter results for Boeing’s defense business are also expected to incur ballooning costs, in turn denting the segment’s sales.

The Zacks Consensus Estimate for this unit’s fourth-quarter sales is $5.5 billion which reflects a year-over-year decline of 19.3%.

Here’s What Our Quantitative Model Predicts

Boeing currently does not have the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: The Earnings ESP for the company is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Boeing carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

Please note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are a few stocks in the Aerospace and Defense space worth considering as they have the right combination to deliver a beat:

Huntington Ingalls Industries, Inc. (NYSE:HII) is expected to report fourth-quarter results on Feb 15. The company has an Earnings ESP of +3.43% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Curtiss-Wright Corporation (NYSE:CW) is expected to report fourth-quarter results on Feb 21. The company has an Earnings ESP of +0.94% and a Zacks Rank #2.

AAR Corp. (NYSE:AIR) is expected to report third-quarter fiscal 2018 results on Mar 20. The company has an Earnings ESP of +5.70% and a Zacks Rank #3.

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