We recently downgraded our recommendation on Embraer S.A (ERJ) to Neutral from Outperform.
The lowered rating is backed by the rising operating cost and significant international competition in the aircraft manufacturing industry, which may adversely affect the company’s margins and market share, respectively. Moreover, rise in wages in Brazil along with the rising fuel cost weakens our view on the stock.
During the second quarter of 2011, the company posted improved results and raised its revenue and margin guidance with a positive outlook. The optimistic outlook is attributable to new strategic agreements, development investments and the anticipation of a strategic order wins from the improved worldwide commercial as well as defense aviation market.
Thus, in order to keep up with the raised outlook and maintain market share over the long term, the company requires continued technological and performance enhancement. However, the company’s global footprint supporting strong customer orders and deliveries over time as well as the product portfolio of corporate and defense jets along with executive jet support structures are anticipated to foster growth.
Embraer’s 1000 order milestone and beyond as well as defense and security solution for Brazilian and other governments worldwide portrays a favorable scenario for growth in the coming quarters.
However, the company’s concentration on a few models and a fluctuating foreign exchange rate exposes Embraer to a considerable risk of impacting profitability going forward.
ERJ has a Zacks Consensus Estimate of 53 cents for the third quarter of 2011 and $2.24 for the fiscal year 2011.
Embraer S.A designs, manufactures and sells aircraft and aviation-related structural parts to the world’s commercial aviation, executive aviation and defense markets. The company’s product portfolio supporting strong customer orders and diversified global footprint, gives a tough competition to its peers, such as Boeing Co. (BA), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), etc.
We are currently providing a long-term Neutral recommendation on the stock. Embraer has a Zacks #2 Rank, which translates into a short-term Buy rating (1-3 months).
