As airlines have seen their shares prices takeoff lately, many are starting to feel a bit more optimistic on the makers of planes too. This largely centers around four companies; Boeing (BA), Airbus, Bombardier, and Embraer (ERJ) which have a dominant position over the jet market.
However, these four are very different, as Boeing and Airbus dominate the large aircraft while Bombardier has a nice hold on the smaller vehicles (such as the business-focused Learjet brand). Meanwhile, Embraer generally fills the niche in between, zeroing in on smaller regional jets for most of its portfolio.
However, as airlines have combined, a new landscape has emerged. Generally speaking, new huge fuel-efficient jets have come on line from Boeing (787) and Airbus (A350), and as smaller planes have come back into vogue a bit, Embraer has largely been left in the dust.
The company is being squeezed on both ends and is having trouble finding a niche in this new competitive environment. Plus, since the company is Brazilian-based, a host of other issues have cropped up lately as well.
Brazil Issues
Since ERJ is a Latin America-focused company, recent weakness in the region hasn’t exactly helped the company prosper. A weakened outlook for Brazil, coupled with Brazilian real uncertainly against the dollar, hasn’t helped matters either, especially for U.S. based investors.
If that wasn’t enough, we have seen price targets lowered as of late, and even government investigations into the business. U.S. and Brazilian authorities are now seeing if ERJ bribed officials in Argentina and the Dominican Republic, a situation that only adds to the firm’s woes in the short term.
Estimates
Thanks to this deluge of bad news, analysts have had no option but to slash their estimates for ERJ over the long term. In fact, seven estimates have gone down for the current year in the past 30 days, while 10 have gone down in the past month for the next year period.
This has led to a catastrophic decline in terms of the consensus estimate for both the current year and the next year period, pushing current year earnings growth to -17%. Meanwhile, next year estimates have fallen from $2.80/share 90 days ago to just $2.27/share today, a decline in expectations of nearly 20% in the span of a single quarter.
ERJ also has a horrendous track record when it comes to matching expectations at earnings season too. The company has seen an average miss of over 26% in the last four quarters, and this is with taking into account a 6.4% beat for the most recent quarter.
Thanks to these factors, ERJ has earned itself a Zacks Rank #5 (Strong Sell). This means that we are looking for further underperformance from this struggling company, and that more losses could definitely be ahead.
Bottom Line
Clearly, ERJ is in a lot of trouble as customers are looking elsewhere for new planes at this time. And with the huge decline in estimates and the poor track record at earnings season, there is little reason to believe that this company can pull itself out of this current tailspin.
Fortunately, there are other options in the aerospace/defense sector that might be better bets at this time. In particular, Boeing currently has a Zacks Rank of 2 (Buy) and appears well-positioned to take advantage of the current trends in the market.
Additionally, a look to airlines might be a better bet. This segment has a top Zacks Industry Rank, so investors may want to look here instead of the struggling ERJ at this time.
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