Embraer Air Enters Turbulence

We are keeping our Sell recommendation on Embraer Air (ERJ - Analyst Report). In our view, Embraer 170/190 line of 70-110 seat jets should continue to be well-received by aviation customers. But this will be partially offset by the growing concern regarding the low-cost carriers plan to add too much capacity too quickly to the global air transport system.

The company's first quarter 2008 results were positive; however, gross margin continues to decline. We remain concerned over the strength of the Brazilian real and its effect on the company's competitiveness. Continuous increase in oil prices and the difficult economic environment in the U.S. remains a threat to the whole airline industry.

ERJ currently trades at 16.1x our estimate earnings for 2008, which is above the industry mean and median. We anticipate that over the near-term, Embraer will underperform the broader emerging market indices. Accordingly, we are keeping our current Sell recommendation on ERJ, with a six-month target price of $34.50, around 13.5x our estimate of 2008 earnings per ADR, in line with the industry mean and close to the S&P average.

Read the full analyst report on ERJ.