Shares of the Brazilian plane maker Embraer SA (ERJ) fell around 6.2% after it cautioned that customer payment delays will likely result in a negative cash flow for 2014.
The world’s third-largest commercial aircraft manufacturer revised its free cash flow (“FCF”) estimate for 2014 to a negative $400 million from its earlier projection of a positive low double-digit number in February last year.
The huge fall in the FCF guidance mostly stemmed from lower expected revenues and an increase in accounts receivables, reflecting extended payment cycles by some clients. Further details will be provided at the release of its fourth quarterly results in early March.
The company’s FCF guidance revision closely followed its year end 2014 delivery announcement. Embraer delivered 82 jets in the fourth quarter 2014, down 3.5% from 85 deliveries in the year-ago quarter. However, fourth quarter deliveries increased significantly from 34 jets delivered in the preceding quarter. Deliveries in the commercial and business aviation markets were 30 and 52 jets, respectively.
Full year 2014 delivery numbers at 208 were almost on par with the 209 jets delivered in 2013. The company delivered 92 airplanes to the airline market and 116 to executive aviation in 2014.
Embraer reported an order backlog of $20.9 billion as of Dec 31, 2014. Despite its bulging order book, we remain concerned about the highly duopolistic aircraft manufacturing industry, dominated by The Boeing Co. (BA) and Airbus, with longer operating histories and established reputations.
Moreover, Brazil’s economic woes along with a series of populist tax incentives have put pressure on the government's finances. This has pushed out payments to 2015, leading to the severe cash flow crunch at Embraer.
Embraer carries a Zacks Rank #4 (Sell). Better-ranked stocks in the aerospace and defense sector include Erickson Incorporated (EAC) and General Dynamics Corp. (GD), both with a Zacks Rank #2 (Buy).
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