Tuesday, July 8, 2008

Has Embraer (ERJ) Hit Bottom?

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Our blogger friend Blue Dog now refuses to travel with the rest of us peons - its private jet or nothing for guys like him. We should all be so lucky. But he got me thinking about the one Brazilian stock that has been in freefall - Embraer (ERJ). This is actually one of the older Brazilian stocks out there - it was trading publicly before Brazil was the place all the cool kids hung out. They make (mostly) commercial and executive jets - if they ONLY did executive jets I'd actually be all about the stock as the top 1% in the world are doing just fine thank you. [Some Parts of the Economy are Booming - Like Yacht Building]

Now with oil in the $140s, all things aircraft have been in free fall, but if you believe (like I do) this is a parabolic move in crude that is due for a correction (in a much longer path upward) you might be interested in such a stock. Especially off of this morning's good news. Backlog is still at record levels despite all the crazy pricing in oil, but I am not sure how "firm" the backlog remains if oil rises to say $200 (which I doubt at this stage of the game). After all Boeing (BA) has a record backlog as well and it's stock is in a similar death spiral.
  • Embraer delivered 52 aircraft during the second quarter of 2008 (2Q08), closing out the semester with record of 97 jets delivered. This result is a 59% increase over the 61 airplanes delivered during the first semester of 2007.
  • The Company's firm order backlog for the Commercial Aviation, Executive Aviation, and Defense and Government segments also ended the quarter at the highest level in its history, totaling US$ 20.7 billion.
  • During 2Q08, Embraer delivered 43 jets to the Airline Market and nine jets to the Executive Aviation segment. With 97 jets delivered during the first semester, Embraer reaffirms its estimate of delivering 195 to 200 jets in 2008, tending toward the higher figure, as well as 10 to 15 Phenom 100 jets.
  • During the second quarter of 2008, Embraer signed contracts for the sale of seven EMBRAER 170 jets to the ETA Star Group, from Dubai and for five EMBRAER 175 jets to TRIP Linhas Aereas, which is one more Brazilian airline that will fly Embraer jets. In the Defense and Government area, the Company signed a contract with the Brazilian government for the sale of two EMBRAER 190 jets configured for transporting government officials. Furthermore, Executive AirShare, of Kansas City, Mo., increased its order for Phenom 300 jets to four firm orders and four options.
  • The Phenom executive jets continued to show positive sales results, with the number of firm order contracts approaching 800 aircraft.
Below is a 3 year chart - now I am not normally a bottom picker but this stock is so far below any resistance area it has me thinking of adding it, if nothing more, as a trade and a hedge against lower oil.

ERJ now trades at 10x forward earnings for 2008 for solid 20-25% growth. Again, I am all about investing in anything catering to the ultra rich in the new Gilded Age (people like Blue Dog) - they could care less about gas $4 or gas $10 for that matter. This is why I wish they only did executive jets.
  • Brazilian jet maker Embraer's executive jet business will increase as a percentage of revenues from 15 percent to 25 percent by 2010, a top executive said Friday.
  • Embraer currently offers the Legacy 600 executive aircraft, which seats up to 13 people, and will start deliveries of two versions of the smaller capacity Phenom jets later this year. By 2013, Embraer will offer another three models: the Lineage 1000, Legacy 450 and Legacy 500, he said.
  • At the same time, he said sales at the commercial jet division will increase.
  • Colin Steven, vice president for marketing and sales, said airport congestion, delays and additional security checks linked to the terrorist threat are drawing business class customers to the executive jet market. (bingo)
  • In the 10 years until 2017, Embraer estimates the global executive jet market to be worth $201 billion. Embraer currently has 15 percent of the market
  • Revenue last year at the world's fourth-largest commercial aircraft jumped to 9.98 billion reals ($5.92 billion), compared with 8.27 billion reals ($4.9 billion) in 2006.
As an aside, another Brazilian stock I used to own/trade before it was fashionable to be in Brazil was airline GOL (GOL) - now that folks is a frightful chart and I'd rather own the manufacturer over the airline business.

No position (yet) but leaning strongly


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