Earnings Preview: The Boeing Company

Aerospace & defense behemoth, The Boeing Company ( BA - Analyst Report ) is all set to report its second quarter 2012 results before the start of trading on July 25, 2012. The Zacks Consensus Estimate for the second quarter of 2012 is $1.10 (year-over-year decrease of 11.6%) on revenues of $19,389 million (year-over-year increase of 17.2%).

First Quarter Recap

Boeing posted first quarter 2011 adjusted earnings per share (EPS) of $1.11, beating both the Zacks Consensus Estimate of 96 cents and year-ago EPS of 79 cents. The company’s strong numbers came from higher commercial planes deliveries which more than offset a tepid quarter for defense.

On a reported basis, Boeing reported quarterly EPS of $1.22 versus 78 cents in the year-ago quarter. The 11 cents difference between reported and operating earnings, during the quarter, was owing to a reduction in a litigation-related reserve.

On the revenue front, higher airplane deliveries pulled up the quarterly revenue year over year by 30% to $19.4 billion, above the Zacks Consensus Estimate of $18.3 billion.

(Read our full coverage on this earnings report: Boeing Tops on Higher Deliveries).

Agreement of Estimate Revisions

Over the last 7 days, 2 of the 19 analysts covering Boeing for the second quarter of 2012 have upped their earnings estimates with 1 downward movement. We believe that the recent upward bias for the first quarter comes on the heel of a strong show by the company at the Farnborough International Airshow and pocketing of a $15 billion aircraft order from United Continental Holdings Inc. ( UAL - Analyst Report ) .

Prior to that, the company, over the last 30 days, has also witnessed positive bias among analysts regarding estimate revisions. In the aforementioned period Boeing witnessed 8 upward moves versus a lone downward revision. The upward revisions are mainly attributed to a strong 2012 Current Market Outlook released by the company at the inception of July. In the outlook, the company estimated the worldwide market for new commercial airplanes to be $4.5 trillion in the next 20 years. Boeing’s projection of growth is based on the strength of the commercial aviation market, recovery witnessed in world economies and strong demand for fleet addition and replacement. Airline traffic is forecast to grow at a 5% annual rate over the next two decades, with cargo traffic projected to grow at an annual rate of 5.2%.

We must keep in mind that Boeing is the largest aircraft manufacturer in the world in terms of revenue, orders and deliveries, and one of the largest aerospace and defense contractors. Its revenue exposure is spread across more than 90 countries around the globe. Due to the continuing recovery of the global economy, demand for Boeing’s Commercial Airplanes is benefiting from a steady improvement in passenger and freight traffic. To catch up with the expected rise in air traffic and to check fuel bills, airliners will need to replace older airplanes with new ones. The company is slated to benefit greatly from improving air traffic.

Estimates for 2012 however have witnessed mixed reactions. Consensus 2012 earnings estimate of $4.57, composed of 23 estimates, witnessed 3 upward revisions compared with two downward revisions over the last 30 days. The cautious stance of analysts on their 2012 verdict on Boeing was in the face of downward U.S. defense budget trends and the incoming effect of sequestration currently required under the Budget Control Act effective from January 2, 2013.

Magnitude of Estimate Revisions

Given the positive sentiment in earnings estimate revisions witnessed over the last month, the consensus earnings estimate for the second quarter of 2012 has gone up by 2 cents to $1.10. Earnings estimate for 2012 has remained fixed at $4.57 per share over the last 30 days.

Surprise History

Boeing has consistently surpassed earnings estimates in the last four quarters. The company recorded a maximum positive surprise of 31.53% in the third quarter of 2011. On an average, the earnings surprise was 26.42%.

Our Recommendation

Boeing currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. This is in sync with other aerospace and defense behemoths. A clearer picture will emerge tomorrow when its prominent defense peers like Lockheed Martin Corporation ( LMT - Analyst Report ) and Rockwell Collins Inc. ( COL - Analyst Report ) release their versions of the second quarter of 2012.