Embraer (NYSE:ERJ) is a Brazilian aerospace firm that produces commercial, military, executive, and agricultural aircraft. I am bullish on the stock.
Economic Drivers
Although the economy as a whole faces uncertain times, with constant growth rate adjustments from economists, it’s safe to say that the upper-end consumers are set to continue spending.
Embraer sells Veblen goods, meaning its goods are not elastic to personal income growth, but to product popularity. Commodity prices have soared, which could lead to agriculturalists upgrading their equipment, U.S. inflation is rising at a rapid rate partially due to discretionary purchases, and military demand can be viewed as a staple to Embraer.
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Earnings, Key Events & Outlook
In August, the company generated revenue of $1.13 billion (+110.3% year-over-year) and, along with that, also reported its first net profit ($43.6 million) since the first quarter of 2018.
During the quarter, Embraer delivered 34 jets, of which 14 were commercial and 20 were executive.
As one would expect, commercial demand for jets has been increasing as travel restrictions are reduced. Additionally, there’s no sign of its executive jet sales slowing down, considering it owns a hefty 17% of that market.
Embraer expects commercial jet deliveries of 45-50 units, along with 90-95 executive deliveries by year-end. This would translate to an EBITDA of $4 billion – $4.5 billion, with a margin of 8.5%-9.5%.
Key Metrics
Embraer has decreased its leverage ratio from above 450% to marginally over 100% (149%). This has commenced along with operating margins breaching the break-even point and subsequently reaching the 3.87% mark.
It has to be believed that the operating margins of Embraer are sustainable because of the way its topline gross profits have converged with R&D expense.
From a valuation vantage point, Embraer is in a good spot. You can usually judge the value of a growth company based on its price-sales and enterprise value/sales, as these metrics are used throughout industry lifecycles.
Embraer’s price-sales and enterprise value/sales are trading below their 5-year averages by 78.23% and 17.20%, respectively.
Risks
Increased tariffs and general prices of industrial metals could have implications to Embraer’s profit margins. Furthermore, the looming pandemic could cause bottlenecks in supply chains & travels, which could, in turn, cause further contagion in the aerospace industry.
Lastly, Brazil’s political climate has been through more turbulent times, and the current presidential fight between Lula and Bolsonaro could hamper the country’s credit rating, subsequently causing additional systemic risk for Embraer and its stock.
Below are a few risks outlined by TipRanks’ algorithm.
Wall Street’s Take
Wall Street thinks Embraer is a Moderate Buy with a $20.60 average price target, implying upside of 9.40%. There have been 3 Buy ratings on the stock, 2 Hold ratings, and no Sell ratings. The final analyst to have placed a rating on the stock is Noah Poponak of Goldman Sachs; Noah thinks the stock could reach the $23.00 handle.
Concluding Thoughts
Embraer has experienced massive upside lately, but I think this isn’t short-lived. The company is gaining market share, while the financial statements provide a good indication as well. If the valuation metrics are anything to go by, then Embraer seems like a choice that investors should consider.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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