Under any other circumstance, Boeing (NYSE: BA ) investors would have been looking forward to the company's second-quarter fiscal 2018 report. But with President Trump at the helm, anything and everything goes. Therefore, the Boeing earnings faced significant anxiety prior to the disclosure.
Obviously, the biggest concern weighing on the iconic airplane manufacturer is the rapidly-deteriorating relationship between the U.S. and China. A few weeks ago, Trump sent ripples through the business community when he threatened to ramp up China tariffs to a shockingly high $500 billion .
Initially, the White House drew up, and later imposed, tariffs on $34 billion worth of Chinese goods. This was in response to allegations that Chinese companies used their influence to steal American intellectual property . The Chinese government quickly retaliated , with their state newspaper specifying an identical $34 billion hit.
Affected product categories include soybeans, pork and electric vehicles.
The bitter economic conflict isn't really a surprise. President Trump prides himself on his "tough guy" image. Additionally, he may believe he has political incentive to act even tougher. A bipartisan voice roundly criticized Trump's deferential behavior towards Russian President Vladimir Putin during the Helsinki summit.
However, experts stressed that the domestic agricultural business was most at risk from Chinese economic retaliation. But given the chaotic political environment, and just ahead of the Boeing earnings report, the aerospace giant's CEO Dennis Muilenburg expressed his reservations .
According to Muilenburg, the aerospace sector thrives on free and open trade. He further emphasized the symbiotic U.S.-China relationship. BA provides a substantive boost for China's emergent economy. At the same time, domestic manufacturing jobs receive a much-needed lift.
Muilenburg's opinions reflect broader business sentiment, which urges Trump not to exacerbate the situation. So how did Boeing earnings stack up against this backdrop?
Boeing Earnings Beat Expectations, But BA Stock Slips
Going into Q2, consensus estimates pegged Boeing earnings per share at $3.26. This was slightly near the lower end of the estimate spectrum, which ranged from $3.04 to $3.51. Actuals came in at $3.33, beating expectations by 2%.
On the revenue front, analysts set a consensus target of $24 billion. Estimates ranged from $23 billion to $24.4 billion. The company delivered $24.3 billion, up 1% against consensus.
On paper, the Boeing earnings report hit on key metrics. However, in pre-market trading, selling pressure dropped BA stock by more than 2%. So what gives?
Primarily, Boeing held the line for its full-year 2018 EPS guidance, which ranges from $14.30 to $14.50. However, the Street expected more, with analysts on average expecting $14.56. Therefore, even if BA delivered on the higher end of their guidance, they'd fall short consensus by roughly half-a-percent.
The other major concern is Boeing's frustrating delays and budget excesses for its military-specific KC-46 tanker. With these issues in mind, the Air Force and BA agreed to a delivery schedule late-last month. That said, the aircraft manufacturer is still not out of the woods, and must revamp the KC-46's critical components.
To account for these efforts, management decided to take a $426 million charge in Q2, according to a CNBC broadcast.
In the same segment, CNBC reported that they asked Boeing about the possibility of a noticeable impact from the China tariffs or rising commodity prices. BA has not reported such impact for now, although this response runs counter to the CEO's concerns.
BA Levers a "Bigger Picture" Advantage
Moving forward from the Boeing earnings report, some analysts have expressed concern that BA stock is overbought. Over the last year, shares have soared more than 68% . BA has a history with this. In the past, when bullish sentiment has become excessively pronounced, BA shares tend to correct sharply over the ensuing years.
As I mentioned earlier, the political environment is anything but stable or predictable. In an alarming social-media post via Twitter (NYSE: TWTR ), Trump proclaimed that "Tariffs are the greatest!" He then ranted about the U.S. not going a fair shake in trade deals, a common Trump complaint.
That doesn't necessarily impact American companies right now. However, statements like these don't do them any favors. It also threatens to undo the positives the Boeing earnings report delivered if the tariff wars spiral out of control.
However, I'd keep in mind the broader fundamentals. BA isn't just focused on high-profile deals like the $98 billion example from last week's Farnborough International Airshow. They're also making less-reported deals, such as the Boeing joint venture with Brazilian aerospace company Embraer . Securing regional dominance around the world not only helps BA against chief rival Airbus (OTCMKTS: EADSY ), but also from growing threats from China, Japan, and Russia.
Also note that BA has stronger overall financials than Airbus. For instance, Boeing features double-digit EPS growth, and 7.5% revenue growth over the past three years. On the flipside, Airbus can only muster single-digit growth for both revenue and EPS during the same timeframe.
Based on what we saw from the Q2 Boeing earnings report, I don't think this dynamic will change anytime soon.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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