We upgrade our recommendation on Empresa Brasileira de Aeronautica S.A., aka Embraer (ERJ), from Underperform to Neutral based on the decent results the company recorded during the second quarter of fiscal 2010.
During the quarter, EPADS was $0.39, an increase from $0.37 in the year-ago quarter. Net income was $70.3 million, up 3.7% from $67.8 million in the second quarter of 2009, driven by lower currency exchange loss attributable to the gradual market recovery.
The positive change in management’s outlook is also encouraging. Embraer increased its fiscal 2010 revenue guidance from $5 billion to $5.25 billion and expects EBIT margin to rise from 6.0% to 6.5%, equivalent to EBIT of $340 million.
Embraer’s product portfolio supports stronger customer orders and deliveries. Embraer is experiencing strong orders for Embraer 170/195 jet and the Legacy. The company is planning to deliver the mid-sized Embraer MSJ or Legacy 450 and the mid-light Embraer MLJ or the Legacy 500 by the second half of fiscal 2012 and 2013, respectively.
Further, three proposed contracts for KC-390 defense aircraft in two months and 4% and 2.8% increase in the US defense budget for the fiscal 2010 and fiscal 2011, respectively, would definitely encourage results in the coming quarters.
Further, Embraer’s strong liquidity with a net cash position of $658.7 million, diversification into broader defense and corporate jets and the support of the Brazilian government are expected to help in the difficult moments ahead.
However, the company’s high dependence on some models, with a primary focus on American airline companies, and significant international competition raises its risk profile. The present difficult situation of the worldwide airline industry can also impose a negative impact in the short term. The stock currently retains its short term Hold rating, equivalent to a Zacks #3 Rank.
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