On Jan 15, we downgraded aircraft manufacturing company,
), to Underperform based on the company's loss of a major
contract from Delta Airlines in mid November 2012.
Why the Downgrade?
Estimates for Embraer, which focuses on the aerospace and
defense markets, have been declining since it lost an important
contract from Delta Airlines in mid November last year, which
went to its arch rival Bombardier Inc., based in Canada. The
order consisted of 40 regional jets with a capacity of 50
passengers. The contract value was vital for Embraer in terms of
revenue generation, due to which the estimates have been revised
In the latest reported quarter, ending September 2012, the
company reported earnings per share of 36 cents, higher than the
earnings of 1 cent per share reported in the year-ago quarter.
However, earnings fell short of the Zacks Consensus Estimate of
54 cents. In the last 60 days, the Zacks Consensus Estimate for
2012 as well as 2013 went down by 2.0% and 5.4%, respectively.
The company now has a Zacks Rank #5 (Strong Sell).
Cause for Concern
Embraer has a lot of possible contracts in the pipeline,
including Light Attack Aircraft, which is to be decided upon in
February. Among them are American and Continental regional jet
orders. Although Embraer has more probabilities of winning the
contracts than rival Bombardier, due to the presence of Embraer
jets in the existing fleet of the companies, there always remains
an overhang until they are actually won by the company.
On top of this, the increasing cost of raw materials for the
company also adds to our concern. Margins for the company are
also under pressure, due to the rise in fuel costs along with
rise in the selling and general expenses.
The Zacks Consensus Estimate for the second quarter of fiscal
2013 has dropped by two cents to 83 cents, in the last 60 days,
on the back of uncertainties of further contract wins.
Aerospace Stocks That Warrant a Look
We prefer other aerospace and defense stocks like
Erickson Air Crane
BAE Systems Plc
) to Embraer. These companies hold a Zacks Rank #1 (Strong Buy)
and a Zacks Rank #2 (Buy), respectively. As for Embraer, we must
wait until we see signs of improvement in the company's
(BAESY): ETF Research Reports
ERICKSON AIR-CR (EAC): Free Stock Analysis
EMBRAER AIR-ADR (ERJ): Free Stock Analysis
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