Embraer (ERJ) is the first and only airplane manufacturer in the world to have entered the commercial jet market since 1960. This is a stock that I first came across a few months back as one of the companies to watch out for in the emerging markets space.
A Brazilian manufacturer, Embraer-Empresa Brasileira de Aeronáutica S.A., engages in the design, development, and manufacture of aircrafts for commercial, business jet, and defense purposes, operating in commercial aviation, private jet market, government and defense aviation. The last few quarters has seen fluctuating earnings which can be attributed to the seasonality and cycles that surround the commercial airline business. But with operating and profit margins at twice the rate of Boeing (BA), and the widely accessible market of South and Latin America, Embraer's future looks bright.
While quarterly earnings had been growing recently at almost 68%, the company's most recent quarter was less than perfect. Production problems (although not quite as bad as Airbus), caused deliveries to go down, along with lower earnings per share and lower revenues than a year ago. But what investors cared most about, the reason the stock actually moved up after earnings on Nov 13th, is the fact that ERJ has a backlog of over $13 billion, 30% higher than the previous quarter. Additionally, the company generated over $450 million in cash flow, a far cry from negative cash flow the same time last year. Despite the recent stock advance on news of the sale of 100 jets to Chinese owned HNA Group worth $2.7 billion and their forecast of 20% revenue annual growth over the next two years, the stock sports a humble Price to Sales ratio of under 2, trades at a humble 16 times next year's earnings and sits just under 10% below its 52-week high.
With customers like JetBlue, HNA and a number of private jet operators in Latin America, coupled with high operating margins without the baggage of "the Unions", Embraer looks quite attractive at these levels. That being said, the stock might come in a little and has some resistance between 40 and 44, but patient investors get rewarded a 2.8% dividend for their perseverance. I recommend opening a half position at these levels, and buying at dips.
There is some risk in this stock considering that ERJ trades as an ADR and is one of Brazil’s largest exports. It is heavily dependent on the Brazilian economy, Latin American politics and oil prices. However, pickup in business travel, increased order backlog and successful entry into the American and specially executive jet market gives the stock plenty of reason to soar.
-- Faisal Laljee