Embraer, Saab Ink Joint-Management Deal for Brazil's F-X2 - Analyst Blog

Brazilian plane maker Embraer S.A.ERJ and Swedish defense group Saab AB have signed a partnership agreement for joint management of the F-X2 project for the Brazilian Air Force. This agreement follows the Memorandum of Understanding announced on Jul 11, 2014.

In Dec 2013, the Brazilian government had chosen Saab's Gripen NG aircraft for the multibillion-dollar F-X2 project and in 2014 Saab signed a $5.44 billion deal to deliver 36 fighter jets for the Brazilian Air Force, in collaboration with regional aerospace giant Embraer. Deliveries are expected to start in 2018 from a joint assembly plant in the country.

The latest accord is an assurance from Saab to provide industrial cooperation in association with the F-X2 project. Embraer will have a major role in the overall program performance. The company will assume an extensive share of work comprising systems development, integration, flight test, final assembly and aircraft deliveries. In addition, Embraer and Saab will jointly be responsible for the complete development of the two-seat version of Gripen NG.

Embraer's team of engineers and technicians will be in Sweden from the beginning of the second half of the year for initial training in maintenance and development work for Gripen NG. The plan is to transfer these skills and competencies eventually to Brazil.

However, the execution of the new partnership agreement between Saab and Embraer depends on the F-X2 contracts between Saab and the Brazilian Air Force Command or COMAER coming into effect. Now, this is subject to certain conditions that need to be fulfilled. The company expects it to be completed during the first half of 2015.

Embraer saw its deliveries declining 3.5% year over year to 82 jets in the last reported quarter. It had a negative free cash flow of $404 million at 2014 end. Brazil's economic woes continue to persist while a series of populist tax incentives are exerting pressure on the government's finances. This has pushed payments to 2015, leading to the severe cash flow crunch at Embraer. Its extended payment cycle is a major drag on its finances as well.

Embraer currently has a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the same space include Huntington Ingalls Industries, Inc. HII , General Dynamics Corp. GD and Air Industries Group AIRI . Huntington Ingalls sports a Zacks Rank #1 (Strong Buy), while General Dynamics and Air Industries carry a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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