A Small Plane Maker With Big Goals

05/12/2008 12:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says Brazil’s Embraer has good products in strong markets and is well positioned for more growth.

Brazil-based Empresa Brasileira de Aeronautica (Embraer) specializes in manufacturing commercial aircraft with 120 seats or less. It also makes military aircraft and private jets for executives. The Americas generated 62% of 2007 revenues, with only 4% from Brazil. Europe generated 24% of revenues.

The commercial aviation market accounted for 64.4% of Embraer’s (NYSE: ERJ) 2007 revenues. The ERJ 145 is a short-haul aircraft with a capacity of 50 passengers. The newer Embraer 170/190 jets seat 70 to122 passengers. While primarily designed for regional travel, these jets can be modified for longer hauls. Customers include major and regional airlines such as American Eagle, JetBlue, US Airways, ExpressJet, Hainan, Air Canada, Finnair, and Lufthansa.

The executive aviation market accounted for 16% of sales. ERJ makes business jets used by fractional-ownership companies, charter companies, air taxis, and wealthy individuals. The Legacy 600 offers a highly customizable executive version as well as a standardized corporate shuttle that can seat up to 37 passengers. Newer offerings include the Phenom 100/300 light jets with a maximum capacity of eight passengers and the Lineage 1000, an ultralarge executive jet based on the Embraer 190 design.

The government and defense markets accounted for 6.6% of revenues. ERJ makes aircraft for various military applications such as armed reconnaissance, surveillance, pilot training, and light attack. The EMB 145 is a modified version of the ERJ 145. Features include an advanced early warning and control system, ground remote sensing capability, and marine remote sensing capability.

Despite strong order growth, production issues caused an 8% decrease in jet deliveries in 2006. By hiring 4,500 new employees, implementing a third shift, and utilizing overtime, the company managed to get back on track in 2007. It also increased its base of subcontracted suppliers, added heavy tooling for wing assembly and production of fuselage sections to its list of industrial capabilities, and increased the number of final assembly bays for its Embraer 170/190 jets.

Deliveries jumped 30% in 2007, [and] net sales surged 39.5% to $5.25 billion. Although the gross and operating profit margins fell [sharply], net income improved 25.4% to $489.3 million or $2.64 per share. Recently reported data on order activity indicate that the near-term outlook for ERJ remains bright. In fact, order backlog at the end of the first quarter increased by $1.5 billion sequentially to $20.3 billion. ERJ is on pace to deliver 195 to 200 jet airplanes in 2008. (The American Depository Receipts closed below $41 Friday—Editor.)

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