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777X Related Charges to Hurt Boeing (BA) in Q1 Earnings

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Solid 737 delivery figures might have contributed favorably to The Boeing Company’s (BA - Free Report) commercial business in the first quarter. However, overall first-quarter 2021 results, scheduled for release on Apr 28, may reflect impacts of pre-tax charges related to 777X program’s changed time line along with reduced production rate for 787.

Click here to know how the company’s overall Q1 performance is expected to have been.

Will 737 Max Boost Q1 Results?

Following receipt of the U.S. Federal Aviation Administration (FAA) approval for 737 Max’s return to service in November 2020, Boeing has ramped up its delivery for the 737 jets. Consequently, we witnessed delivery of 63 737 jets in the first quarter of 2020, compared with a mere five units delivered in the year-ago quarter. This must have contributed favorably to Boeing’s commercial revenues in the soon-to-be-reported quarter.

However, the company is bound to have incurred significant expenses on account of the huge number of 737 aircraft that are still parked in the company’s storage facilities. This must have weighed on the company’s commercial bottom-line performance.

The Boeing Company Price and EPS Surprise

The Boeing Company Price and EPS Surprise

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

Production-related Issues

The recovery observed in global air traffic recently has not been enough to offset the impact of reduced demand, which touched rock bottom. In fact, this forced the company to take down production rates for the 787 and 777 programs by approximately half due to COVID-19 impact and to moderate the rate of ramping up 737 production.

Moreover, based on the latest assessment of COVID-19 impacts on market demand, Boeing had to make changes in 777X program time and currently expects to deliver the first 777X jet in late 2023. This has created significant pressure on the 777X program's revenue and cost estimates, resulting in reach-forward loss worth $6.5 billion for the program.

These factors might have had an adverse impact on the jet maker’s commercial unit top line.

Currently, the Zacks Consensus Estimate for Boeing’s commercial business segment’s revenues, pegged at $4,601 million, indicates 25.9% decline year over year.

Earnings Prospects

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 already incurred $2.6 billion as of Dec 31, 2020. We expect the company to have incurred similar notable abnormal production cost in the first quarter as well.

Apart from such abnormal production costs, pre-tax charges related to changes in 777X program time line as well as production inefficiencies-induced charges incurred for its KC-46A program are projected to have weighed on Boeing's commercial unit's operating margin. This along with lower commercial service volumes must have also impacted this unit’s earnings figure in the first quarter of 2020.

Currently, the Zacks Consensus Estimate for its commercial unit is pegged at a loss of $203 million.

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 +5.55% and a Zacks Rank #3. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Other Stocks to Consider

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

Moog Inc (MOG.A - Free Report) has an Earnings ESP of +8.41% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Triumph Group (TGI - Free Report) has an Earnings ESP of +9.80% and a Zacks Rank #3.

A Recent Defense Release

Lockheed Martin (LMT - Free Report) reported first-quarter 2021 earnings of $6.56 per share, which surpassed the Zacks Consensus Estimate of $6.32 by 3.8%. The bottom line also improved 7.9% from the year-ago quarter’s $6.08.

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