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Embraer's Market Outlook Strong, Stiff Competition a Woe

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On Jul 20, 2017, we updated a research report on Embraer SA (ERJ - Free Report) , a company that designs, manufactures and sells aircraft and aviation-related structural parts, to the world’s commercial aviation, executive aviation as well as defense markets. It is one of the leaders in the commercial aircraft space with a seating capacity of up to 130, and has produced over 5000 jets so far.

Notably, Embraer continues to lead the 70- to 130-seat commercial jet market. Commercial Aviation revenues represented 62% of the company’s total revenue in the first quarter, up from 54.3% last year.

Furthermore, the company has a series of healthy contracts and tie-ups with other companies for its jets. It also continues to witness strong demand for its E-jets, which resulted in booking of several orders for the company in the first quarter of 2017. Evidently, Embraer received order for additional four E175 from American airlines.

Going forward, the company sees more room for growth given the rising air traffic. In its 20-year Market Outlook, the company stated that it expects total market deliveries of 6,400 jets, which include 2,300 units in the 70- to 90-seat segment and 4,100 units in the 90- to 130-seat segment by 2035.

In addition, the 70- to 130-seat jet world fleet-in-service, the fastest growing among all aircraft seat segments, will increase from 2,670 aircraft in 2015 to 6,690 by 2035. While replacement of ageing aircraft will represent about 37% of new deliveries, 63% of deliveries will represent market growth. Embraer has a strong presence in this segment and is therefore likely to witness significant top-line growth.

On the flip side, Embraer requires to invest steadily in technology and performance enhancement to meet growing demand in the aircraft manufacturing market. This is because it operates in a highly competitive commercial aircraft manufacturing industry dominated by two companies – The Boeing Co. (BA - Free Report) and Airbus Group SE (EADSY - Free Report) – with a long operating history as well as an established reputation.

Again, orders for the company's new airplanes from its global customers depend on the economic condition of those countries, trade barriers in foreign markets and prevailing credit conditions in international financial markets. Domestically, Brazil’s economic woes along with a series of populist tax incentives have put pressure on the government's finances. Also, Embraer is exposed to foreign currency fluctuations.

Price Movement

Shares of Embraer have lost 4.4% in the last one year against the industry's gain of 28.7%. This underperformance could have been caused by the weakening Brazilian real against the U.S. dollar. Additionally, the softness observed in the company’s Defense and Security business remains a concern.



Zacks Rank & Stock to Consider

Embraer currently carries a Zacks Rank #4 (Sell). A better-ranked stock in the same space is Northrop Grumman Corp. (NOC - Free Report) holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Northrop Grumman surpassed the Zacks Consensus Estimate in the last four quarters with an average positive surprise of 10.87%. Furthermore, the company's 2017 earnings estimates climbed 4.6% to $12.37, in the last 90 days.

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