Boeing Drops 2%: Will Earnings Disappoint?

Boeing (BA) sits just 5.1% off its 52-week high. It’s releasing earnings this month Put the two together, and you have a recipe for weakness. Boeing has dropped 1.7% to $113.45 at 11:22 a.m., making it the biggest loser in the Dow Jones Industrial Average.

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RBC Capital Markets’ Robert Stallard thinks the earnings report could help push Boeing’s shares higher. He writes:

After a strong share price run this year, we think the challenge for Airbus and Boeing is to maintain this momentum. The 3Q results could help, though any upside is likely to come from internal efforts on cash and margins, versus revenues. The strength in large jets is likely to remain in stark contrast with business jets, where we are expecting another weak quarter for demand in small cabin, with a steadier performance in the mid and large cabin segment. The NBAA show during the earnings season could see some interesting new product launches, which have historically helped stimulate demand.

As for Boeing specifically, Stallard explains why the quarter should look good:

We expect another good result from BCA after it delivered 170 aircraft in the quarter, one more than in 2Q13. We could see performance at BCA, not withstanding potential margin dilution from 787 deliveries, partially offset by DoD budget related declines in its defense business. However, the impact of the sequester is likely to remain muted until next year, and the impact will likely be more significantly felt in the defense order book. The focus has increasingly shifted to cash generation and deployment, so progress on that front would be welcome. We could see Boeing firming up or increasing its commitment to returning cash to shareholders via the buy back. Our "core" EPS estimate for 3Q13 has been increased from $1.48 to $1.55 on higher BCA deliveries.

Of course, the government shutdown and debt-ceiling showdown have impacted Boeing’s stock, as well as other defense contractors. Stallard explains how who could be affected:

With the debt ceiling looming next week, we could see investor nerves rattling as the deadline approaches – and some of this appears to have shaken sentiment in defense. This is likely to contrast with 3Q earnings, which we expect to be as resilient as those seen in the first two quarters of the year for late cycle contractors. By contrast, services are likely to have again been weak, and we are not getting our hopes up over bookings and any preliminary thoughts on 2014, especially for shorter cycle, less visible areas.

Stallard sees KEYW Holding (KEYW) and Textron (TXT) potentially missing earnings, while Honeywell (HON),  Alliant Techsystems (ATK), Lockheed Martin (LMT), Raytheon (RTN) and Wesco Aircraft (WAIR) could beat.