The largest Brazilian aircraft manufacturer, Empresa Brasileira de Aeronautica S.A. (ERJ) – Embraer, focuses on defense aircraft. The company recently formed an agreement with the Portuguese Defense Minister to deliver six KC-390 military transport jets for the latter’s air force and with the Czech government to deliver two KC-390 aircraft.
 
In August, Embraer signed an agreement with Chile’s National Aeronautical Enterprise (Empresa Nacional de Aeronautica – ENAER) to deliver KC-390 military transport jets. In July, the Brazilian Air Force (FAB) also announced its intention to buy 28 KC-390s.
 
The KC-390 with a cargo capacity of 23.6 tons is expected to start operating as early as 2015. The Defense segment forms a significant part of Embraer’s revenues, as during the second quarter of fiscal 2010 alone, the segment contributed 13.0% of total revenues.
 
The defense aircraft contract as well as changes in the U.S. Defense budget would influence the segment. Three proposed contracts in two months and an increase in the U.S. defense budget for fiscal 2010 and fiscal 2011 would definitely encourage results in the coming quarters.
 
In fiscal 2010, the U.S. government proposed a 4% year-over-year increase in its defense budget and, in fiscal 2011, the government anticipates a 2.8% increase in the budget from the 2010 level.
 
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.
 
Thus, the stock currently retains its short-term Strong Buy rating with the Zacks #1 Rank.
 
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