We recently maintained a Neutral recommendation on Embraer S.A. (ERJ), a Brazilian aircraft and aviation-related structural parts manufacturer.
Apparently, things are not going Embraer’s way for the last three trailing quarters as the company failed to meet the Zacks Consensus Estimates, with four quarters average being a negative 59.3%.
Second quarter 2012 was also a bad quarter to report for the company. Earnings per ADR, though came in at 30 cents; lagged the Zacks Consensus Estimate by a whopping 49.2%. Revenues fell 26.4% to $1.7 billion.
The dismal results reflected a heavier tax burden, rising wages in Brazil, overt dependence on a few customers and a drop in demand for business jets. Moreover, rising expenses on the back of a competitive aircraft manufacturing industry and increasing cost of sales and services had an adverse impact on the company’s margins in the quarter.
Despite the near-term setbacks, Embraer's firm order backlog and strengthening worldwide customer order servicing and on-time deliveries of corporate, defense jets and executive jet-support structures bode well for the stock. Moreover, Embraer has solidified its position in the security solutions business across the Brazilian as well as other foreign governments generating healthy revenue across segments.
Further, the company continues to invest in the global support network incorporating new service centers and dealers. All such strategic deals and partnerships are expected to lend more stability to the company’s investment stream and ensure future growth.
All the above factors thus balance our view and we, therefore, prefer remaining on the sidelines for Embraer. The company currently holds a Zacks #3 Rank, implying a short-term rating. Its nearest competitors are Boeing Co. (BA), Erickson Air-Crane Incorporated (EAC) and Northrop Grumman Corporation (NOC), each holding a Zacks # 2 (Buy) Rank.
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