Boeing revenue approach as company faces new problem with 787 planes

It may sound a bit harsh, but it feels like: Boeing (NYSE: BA) Just can’t get out of the way.

After resuming 737-MAX flights in the US in late 2020 after being grounded for nearly two years, BA continues to experience problems with its 787 aircraft. The 737-MAX’s return was also not perfect, with electrical problems on some aircraft.

All of this could explain BA’s disappointing performance. By mid-July, it was up just 2% in 2021, well behind the 16% growth of the S&P 500 Index (SPX). It is also lagging behind its industrial counterparts, which are up nearly 17% this year.

Going into earnings later this week, BA has some things to celebrate from Q2 but also faces new concerns. Most recently, BA said it will cut production of 787 “Dreamliner” after finding a manufacturing-related structural defect, Reuters reported. In addition, a major customer partially canceled a 737-MAX order. It was a double blow to the US aircraft maker’s recovery from the COVID-19 pandemic.

The 787’s problem apparently comes down to manufacturing quality. There are questions about whether the fuselages of the aircraft were properly assembled to the tiny fractions of an inch needed, and whether the company’s verification process of that problem was adequate, media reports said.

This issue will not affect aircraft already in service, so no grounding is required, BA said. Still, it is holding back delivery of some new aircraft and raising questions about the company’s basic manufacturing process and inspection capabilities. That can be a little troubling for airlines buying BA equipment. The company has approximately 100 undelivered Dreamliners. In April, it said it expected to deliver a majority of those jets by 2021. However, BA now says it won’t meet that target because of the 787’s problems.

To make matters worse, BA suffered 60 order cancellations in June, a sharp increase from May. All these issues are swirling as BA prepares to report its Q2 results on Wednesday.

Income call can provide insight into travel trends

The company’s appeal could be an opportunity for investors to regroup and gain some additional insight into the new 787 problem, how many planes it involves and how long it could take to get it resolved. It’s also a good opportunity to get BA’s opinion on the airline industry’s recovery and how much it could be harmed by this new wave of Covid cases.

BA is coming off six consecutive quarterly losses, but until recently, executives had expressed optimism about 2021, which should bring some positives. Passenger traffic continues to improve despite the Delta variant, with the number of people passing through airport checkpoints often reaching two million per day, according to the Transportation Safety Agency (TSA). That’s still several hundred thousand a day below 2019 numbers, but a huge year-on-year improvement.

However, long-haul traffic is far from over, hurting demand for some of the wide-body vessels BA builds. Earlier this month in its earnings call, Delta (NYSE: DAL) offered some hope of a return from business travel. That’s another area that’s slowly recovering.

FIGURE 1: LONG DESCENT. Shares of Boeing (BA candlestick) are trading well below their 2021 high and have been outpaced by the S&P 500 Index (SPX purple line) so far this year. Data source: NYSE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance is no guarantee of future performance.

At a financial presentation early last month, BA CEO Dave Calhoun spoke of BA having “three mountains to climb”. They include recertifying the 737-MAX, recovering from Covid, and repairing or restoring supplies in China.

“We need to have a framework where our governments want to come back together, restore trade in selected areas, and I think in the case of the United States, Boeing and commercial space travel should be a high priority in light of the number of American jobs associated with it and the global leadership we have enjoyed for so long as an industry,” Calhoun said. “It’s based on doing business and trying to keep doing business in China. So from those three mountains that we are still recovering from in different stages.”

One thing that could aid recovery, assuming BA can quickly solve this new 787 challenge, is the rapid pace of reopening. Calhoun said last month that the industry’s recovery has been “pretty robust”, but now that is being questioned as the Delta variant of Covid increases.

Quarter interrupted by 787 Concern, Covid

Before the 787 problem arose, you could argue that BA had a pretty decent Q2.

For example, at the end of June United Airlines (NASDAQ: UAL) announced it would purchase 200 737-MAX aircraft as part of an expansion plan. Of these, 150 are Max 10s, the largest in the family. BA made its first MAX 10 test flight in June.

The UAL purchase was a nice confidence boost for BA investors after two years of MAX issuance. And the order made June the best month for new BA orders since 2018, before two crashes grounded the MAX.

Boeing said it delivered 45 jets last month. Of these, 33 were 737 MAX jets, two military versions of the 737 and 10 widebody jets. But only one was a 787, from Turkish Airlines. Most of the rest of the widebody’s were either cargo planes or military jets, indicative of weakness in the widebody portion of the market, CNN noted.

The previous timeout left BA executives sounding cautiously optimistic about what 2021 would bring. They said the general climate remains “challenging” and domestic air traffic recovered faster than international.

At the time, BA said it expected revenue, profit and operating cash to improve from 2020, driven by commercial deliveries.

“The sales improvement from 2020 to 2021 will be driven primarily by higher deliveries of 737 and 787 as we plan to de-stock and deliver from production lines,” said Gregory Smith, BA’s Chief Financial Officer, of the earnings call for the first quarter.

That guidance could now be called into question. Looking ahead to second-quarter earnings, investors may want to focus on whether BA can live up to its forecast for improved earnings and earnings for 2021 given the new challenges.

Last time out, BA reiterated its forecast to increase production of the 737 MAX to 31 per month in early 2022 and its estimate to deliver its first 777X wide-body jet by the end of 2023. This upcoming earnings call offers investors a chance to see if BA sticks to those timelines.

Reuters recently reported that BA has no plans to increase MAX production until the situation in China is clear. BA is still awaiting approval from Chinese regulatory authorities to resume the plane’s flights in China.

Things appeared to improve somewhat earlier this month as Chinese regulators agreed to allow flight testing of the plane, media reports said. Hopefully BA can provide an update on China during its call.

Looking beyond, analysts expect BA to return to positive gains later this year. The consensus for the current quarter is $0.02 per share, rising to $0.57 in the fourth quarter. But a lot of this depends on BA getting out of the way and running smoothly. For now, based on the stock’s recent performance, investors don’t seem too confident BA can.

Boeing Income and Options Activity

BA is expected to report adjusted earnings per share of $-0.72 per share, versus a prior year earnings of $4.79 per share, according to estimates from outside consensus analysts. Revenue is estimated at $17.78 billion— an increase of 51% compared to a year ago.

The options market has priced in a price 3.3% stock movement in both directions around the upcoming release of earnings according to the Market Maker Move™ indicator on the thinkorswim® platform.

Looking at the options expiration on July 30, put activity is spread out, but with some concentration at the 200 strike. The calls were most active on the 230 and 240 strikes. Implied volatility is in the 9th percentile on Monday morning.

Note: Call options represent the right, but not the obligation, to buy the underlying asset at a predetermined price over a specified period of time. Put options represent the right, but not the obligation, to sell the underlying asset over a specified period of time at a predetermined price.

TD Ameritrade® Commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Features and risks of standardized options.

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