Q2 Industrials Sector Earnings Preview: Rebound in Stocks

After lagging behind the Dow Jones Industrial Average ($DJI—purple line) for much of the year, the S&P Industrial Select Sector Index (IXI—candlesticks) began a nice run in June as the economy appeared to improve.

Lockheed Martin: The aerospace company easily beat analysts’ Q2 earnings and revenue expectations when it reported on July 18 and raised annual revenue guidance by $1 billion. LMT shares rose into earnings and then leveled off after the company reported. They remain well off 2023 highs.

One challenge is the Pentagon’s recent decision to stop accepting certain upgraded F-35 fighter planes built by Lockheed. This could mean a slowdown in deliveries for the company. The upgrade in focus is called Tech Refresh 3 (TR-3), and the Pentagon wants to make sure planes equipped with that hardware are validated for “relevant combat capability,” according to industry publication Breaking Defense. That said, F-35 deliveries jumped from five units in Q1 to 45 units in Q2.

CSX: The railroad company saw earnings roll a bit off track when it reported July 20. The company slightly missed analysts’ revenue expectations and reported earnings per share (EPS) that matched Wall Street’s estimates. That EPS performance might be fine for many companies, but it rang warning bells for CSX investors because it was the first time in five years that CSX failed to surpass EPS estimates. The company saw declining volume in a number of key products it transports, including agricultural and food, chemicals, and forest. Volume growth in coal provided some locomotion. Intermodal, which means using two transport modes to move freight (which often means converting freight from highway to intermodal rail), continued to struggle in the latest quarter. Railroads have grappled with worker shortages and supply chain issues. The latest CSX earnings raises questions about overall U.S. economic health.

Boeing:

Scheduled report date: Wednesday, July 26, before opening bell

• Expected Q2 EPS (analysts’ consensus): –$0.90
• Year-ago EPS: –$0.37
• Expected Q2 revenue (analysts’ consensus): $18.37 billion
• Year-ago revenue: $16.68 billion

The jet maker’s quarterly deliveries, announced prior to earnings, can serve as a good primer of what to expect on reporting day. Deliveries inched up from 130 in Q1 to 136 in Q2, the company said in a July 11 press release. It took orders for 407 planes during the quarter, including an order of 190 737s from Air India.

Deliveries rose from Q1 for 757, 767, and 777 jets, but 737 deliveries fell from 113 in Q1 to 103 in Q2. Overall, Boeing fell behind competitor Airbus Group SE (EPA:AIR) in terms of Q2 deliveries, but Boeing deliveries did rise more than 12% year over year.

BA shares have been choppy most of the year but did gain altitude by mid-July. On the company’s last earnings call, CEO David Calhoun said, “challenges remain,” and there’s more to do, but generally Boeing felt good about the financial and operational outlook it shared late last year.

One question, however, remains: Will 737 deliveries recover? That particular plane had some production hiccups that Boeing said it regretted on its last call. It still planned then to deliver 450 737 planes this year. Demand, Boeing said, remained strong for all production lines.

Honeywell:

Scheduled report date: Thursday, July 27, before the opening bell

• Expected Q2 EPS (analysts’ consensus): $2.21
• Year-ago EPS: $2.10
• Expected Q2 revenue (analysts’ consensus): $9.17 billion
• Year-ago revenue: $8.95 billion

This will be Honeywell’s first earnings call with new CEO Vimal Kapur. The maker of airplane parts, automation equipment, and air conditioners might be asked on the call about its mergers and acquisitions (M&A) strategy, something it’s been under pressure to jumpstart after a few lean years on that front, according to a Bloomberg analysis earlier this year. Kapur, as the new CEO, may use this call to discuss strategy and where he sees the company going in a period that’s seen rapid consolidation across the industry. Honeywell, in contrast, has stressed a diverse product portfolio, which served it well during the pandemic when some companies focused only on aerospace, for example, took a hit.

HON’s Q1 results beat its own guidance and exceeded Wall Street’s expectations. The company also raised guidance. Commercial aviation was a highlight, growing double-digits, and the energy business also shined. Overall orders remained positive, and pricing was another tailwind. Free cash flow improved significantly from a year earlier.

One thing to file away as Q2 results approach is that Honeywell faces tough comparisons versus a year earlier, the company said on its Q1 earnings call. This is especially true for Honeywell’s Performance Materials and Technologies and Building Technologies businesses. Aerospace is expected to remain strong in Q2, Honeywell said.

Caterpillar:

Scheduled report date: Tuesday, August 1, before opening bell

• Expected Q2 EPS (analysts’ consensus): $4.58
• Year-ago EPS: $3.18
• Expected Q2 revenue (analysts’ consensus): $16.49 billion
• Year-ago revenue: $14.25 billion

In Q1, Caterpillar delivered solid profit growth amid rising margins, helped by a 17% year-over-year revenue gain and what the company called “favorable price realization,” which is code for higher prices.

Looking over the balance sheet, however, there were some areas of weakness investors might want to follow up on in Q2, including challenges from unfavorable foreign currency (a common theme across the industrials sector) and weak sales growth of just 1% in Asia/Pacific. The company also had to deal with higher manufacturing costs due in part to higher materials costs, another theme in the sector.

Like many companies, Caterpillar faced supply constraints exiting the pandemic. CAT shares reflected that earlier this year before going on a hot streak in June as the U.S. economy appeared to improve. The rally also came after Caterpillar executives said in their Q1 earnings call that 2023 would turn out better than they’d previously anticipated. They guided for earnings and cash flow in the top half of the company’s targeted range, led by momentum in the North American market.

In the Q1 call, Caterpillar expressed some concern about possible demand weakness in North American commercial office space construction following last spring’s banking turmoil but said it shouldn’t have a major impact on results. On a more positive note, the company could get support from federal dollars flowing out of last year’s infrastructure bill. The impact from that has just begun, and Caterpillar expects it to continue for a while, executives said. Overall end-user demand looked firm in Q1, Caterpillar said, so we’ll see if that remains the case a quarter later.

Deere:

Scheduled report date: Friday, August 18, before opening bell

• Expected fiscal Q3 EPS (analysts’ consensus): $8.18
• Year-ago EPS: $6.16
• Expected fiscal Q3 revenue (analysts’ consensus): $14.23 billion
• Year-ago revenue: $13 billion

DE shares had a nice run over the last month but haven’t kept up with the broader market year to date. The recent pop might reflect in part some of the updates Deere executives shared in their last earnings report, where they touted “strong demand, favorable pricing, and supply chain improvements.”

In the company’s nearly $8 billion Production and Precision Ag business, sales rose more than 50% in fiscal Q2, a gain that might be hard to improve on in Q3. Still, fundamentals look pretty healthy for agriculture, especially after recent gains in grain prices following more tensions related to the war in Ukraine.

One challenge for Deere, along with other industrials firms, is moderating inflation that could take the wind out of price increases that helped drive earnings growth in previous quarters. Deere warned of that in its last earnings call. This means margins may be tougher to grow from here. On the other side of the equation, Deere and other industrials companies appear to enjoy help from strong U.S. infrastructure spending following last year’s legislation from Washington. And supply chain improvements really seemed to move the needle for Deere last time out, reducing production costs.

Deere has heavy exposure to agriculture, so expect analysts to ask for the company’s latest assessment of farm fundamentals on its earnings call. Deere is also heavily exposed to international markets, including South America and Europe, so its earnings and call could be useful for anyone interested in international investing.

***

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options .