The gradual economic recovery is encouraging almost all the industries to open up. The airline industry, which took a big hit from the recession, is also looking for opportunities as the fuel cost is more or less half of $150 per barrel in 2008.
Empresa Brasileira de Aeronautica S.A., or Embraer (ERJ), the largest Brazilian aircraft manufacturer, has recently started erecting a project in Évora, Portugal, slated for completion by fiscal 2011, to manufacture complex airframe structures and components using composite materials. The production is expected to begin by early fiscal 2013.
Embraer’s product portfolio supports stronger customer orders and deliveries. Embraer is experiencing strong orders for its 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.
Embraer recently delivered the first large category Legacy 650 executive jet to Amsair Aircraft Limited, and the first Phenom 100 entry level jet to India’s Invision Air Services Pvt. Ltd., a Mumbai-based on-demand air charter company.
During the third quarter of fiscal 2010, Embraer delivered 44 aircraft, including 20 commercial jets and 24 executive jets, a decrease from 69 deliveries in the second quarter of 2010. However, the order backlog remained flat at $15.3 billion.
Embraer received five contracts for KC-390 defense aircraft in the first quarter of fiscal 2010. Hence, it is expected to sell at least 54 KC-390 defense aircraft beginning fiscal 2015. The Defense segment contributes a significant part of Embraer’s revenues. During the nine months ended September 30, 2010, the segment contributed 13.0%.
The defense aircraft contract as well as changes in the U.S. Defense budget would influence the segment. However, the 4% and 2.8% year-over-year increases in the U.S. defense budget for fiscal 2010 and fiscal 2011, respectively, would drive results in the coming quarters.
For the longer term, we reiterate our Neutral recommendation. The stock currently retains its short-term Hold rating with the Zacks #3 Rank.
EMBRAER AIR-ADR (ERJ): Free Stock Analysis Report
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