We maintain our Neutral recommendation on
Embraer S.A
(
ERJ
).
Improved worldwide commercial and defense aviation demand
reflect a positive outlook for the future. In such a scenario, we
believe Embraer will be able to sustain its strong position in the
security solution business across Brazilian and other governments
with a series of applications.
Embraer's worldwide customer orders servicing and on-time
deliveries of corporate, defense jets and executive jet-support
structures are worth mentioning. Such efforts are expected to
foster stronger global footprints while generating healthy revenue
in the near future. We are confident of the company's
diversification into broader defense and corporate jets, which are
anticipated to lend more stability to the company's earnings stream
and foster cash flow growth, going forward.
Conversely, concern remains as the competitive commercial
aircraft manufacturing industry stay dominated by companies with
longer operating histories and established reputations. We suspect
that Embraer's ability to retain market share and remain
competitive in the commercial aircraft manufacturing market, in
such a scenario, will call for continued technological and
performance enhancement, involving a recurring cost to the
company.
Rising cost is also matter of anxiety for Embraer. Cost of sales
and services as well as administrative, selling and research
expenses has exerted pressure on operating margins, hindering
growth. Moreover, the recent rise in fuel prices and the
appreciation of the Real against the U.S. dollar have also been
affecting the company's profitability.
These headwinds weaken our view on the stock. Adding to the
woes, the scenario of rising wages in Brazil has also been
compressing margin, since long.
The company' earnings growth has, over time, been severely
impaired by order cancellations due to a high concentration of
customer preference on a few models. Besides, a drop in demand for
business jets as well as reduction in government spending on
defense and security poses uncertainty. Overt dependence on a few
customers, accounting for a major portion of the company's firm
backlog, is also anticipated to severely impact the company's
earnings growth, going forward.
Although the scenario looks bleak, this Brazilian aircraft
manufacturer and seller, still kindles the flame of hope for the
investors. Of late, Embraer received orders for 13 ERJ Jets from
China and established a joint venture, "Harpia," with AEL Sistemas,
the Brazilian subsidiary of an Israeli defense firm Elbit
Systems.
The company's technology deal with Alcoa deserves special
mention. Such strategic deals are anticipated to lend more
stability to the company's investment stream ensuring future
growth. We believe, the company's efforts to improve productivity
and efficiency alongside a firm order backlog, may combat the
potential risks for the stock.
Embraer S.A designs, manufactures and sells aircraft and
aviation-related structural parts to the world's commercial
aviation, executive aviation and defense markets. The company's
product portfolio supporting strong customer orders and diversified
global footprint, gives a tough competition to its peers, such as
Boeing Co.
(
BA
),
Lockheed Martin Corporation
(
LMT
),
Northrop Grumman Corporation
(
NOC
), etc.
EMBRAER AIR-ADR (
ERJ
): Free Stock Analysis Report
LOCKHEED MARTIN (
LMT
): Free Stock Analysis Report
NORTHROP GRUMMN (
NOC
): Free Stock Analysis Report
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