If Boeing is a tariff bellwether watch out

If Boeing is a tariff bellwether, watch out

Summary

The biggest U.S. exporter of goods by dollar value flew into previously unforeseen turbulence in the second quarter.

Margins called out

Global stocks were roiled by Wall Street’s disappointed reaction to Boeing’s quarterly report. It beat profit and revenue estimates, but reduced margin forecasts for its defence business. Its shares fell as much as 3.5%.

No ‘Tariffs’, many ‘Charges’

Boeing didn’t spotlight restrictive international trade conditions. In fact, it didn’t mention ‘trade’ or ‘tariffs’ in the summary release at all. ‘Charge(s)’ however were peppered throughout. Higher costs for the long-delayed KC-46 in-flight refuelling tanker programme were in focus. These amounted to $426m. Other signs of deteriorating earnings quality included a 2.6 percentage point year-on-year decline of its defence, space and security segment margin. Unforeseen KC-46 delays and changes were to blame. Margin issues also echoed in guidance. Boeing raised revenues expected in 2018 to $97bn-$99bn from $96bn-$98bn previously, but EPS guidance was static at $14.30-$14.50. That left Wall Street exposed given $14.56 a share consensus.

Tariff bomb hits

The key takeaway is that unexpected costs, whilst not unusual occurrence, were off the radar till Wednesday. Their size was also alarming. Furthermore, they follow Boeing’s consistent warnings about possible tariff impact. The lack of a material outlook upgrade by rival Northrop Grumman, despite its own earnings beat, also pressured the sector. Six of the 8 biggest names traded lower. Other industrial multinationals reporting on Wednesday were more direct on trade. GM blamed rising steel and aluminium costs due to tariffs for a reduced full-year profit forecast.

Peak Boeing

True, the stars are still aligned for aerospace and defence in ways they’re not for automobiles. Boeing’s commercial airplanes segment, its largest, saw an operating margin jump of 240 basis points. The division’s order backlog rose to $488bn in the quarter from $486bn. Defence manufacturing is also having a great cycle. Global demand for military aircraft is robust whilst the Trump administration is also likely to raise defence spending. But after rising 157% between Trump’s election and early June, Boeing shares largely price foreseeable growth. At 22 times earnings forecast over the next 12 months, the stock’s valuation also outpaces most rivals. That makes Boeing a prime candidate for portfolio lightening.

Thoughts on Boeing’s technical share price chart

Wednesday’s descent confirms a failure to re-establish the broken rising channel that commenced in March. This follows a severe challenge between June and earlier this month. The 17-session gap between breakdown and re-entry on 17^th July made accomplishing the feat a big ask. In the event, the rejection was swift. Monday’s rise reached the underside of the lower rising trend line but went no further. It was the final nail in the coffin for the pattern. The key watch now is whether corroborated support near $352 dollars will hold. Price straddles the line almost precisely late in the session. A fearsomely attenuated candle isn’t the best harbinger for buyers. Signs of support are visible at 61.8% of the recent up leg. But common sense suggests any decisive break lower may require last month’s support near $327 to prevent a deeper correction. With the Relative Strength Index almost central in its range but bearish in direction, chances of a return to mid-year lows look enhanced. A complete inversion of the 21-day moving average in coming sessions would confirm a bearish medium-term direction.