On Jan 19, 2015, we have issued an updated research report on Embraer SA (ERJ).
The Brazilian plane maker continues to lead the market for commercial jets with a capacity of 70 to 130 seats. As of Dec 31, 2014, the company had an order backlog of $20.9 billion, up 14.8% year over year. Also, the company reported 208 deliveries in total, which were almost on par with the 209 deliveries in 2013.
A report from Bombardier claims that deliveries for commercial airplanes in the 20-149 seat segment will reach 13,100 units by 2033, reflecting a net addition of 5,500 units from 2013 levels. We believe that the global airplane demand surge is strong enough to accommodate players like Embraer and Bombardier.
With the demand for commercial airplanes expected to shoot up soon, Embraer continues to focus on technological innovation to enhance the quality of its products. Innovations are an integral part of the company’s activities. In fact, about 34% of the net income earned by the company in 2013 came from innovations carried out by the company in 2009–2013.
Embraer reported positive earnings surprises in all of the last four quarters, delivering an average beat of 59.12%. Rising demand for commercial airplanes along with a focus on research and development will boost bottom-line growth, going forward.
However, currency risks, intense competition and inherent operational risks in the aircraft manufacturing industry are our major concerns.
Moreover, Embraer revised its free cash flow estimate for 2014 to a negative $400 million from its earlier projection of a positive low double-digit number. Payment delays were the primary reason for the negative revision. We are thus concerned about the extended payment cycle, which might be a major drag on the company’s finances.
Other Stocks to Consider
Embraer holds a Zacks Rank #4 (Sell). Better-ranked stocks in the same sector include The Boeing Company (BA), Northrop Grumman Corporation (NOC) and Textron Inc. (TXT), each carrying a Zacks Rank #2 (Buy).
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