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Embraer's Q2 Deliveries Up Y/Y, Backlog Declines to $18.5B

Zacks Equity Research

Embraer S.A. ERJ recently reported its second-quarter 2017 deliveries of 59 jets compared with 52 in the year-ago period, reflecting an increase of 13.5%. The deliveries were also 78.8% higher than the first-quarter level.

The company delivered 35 and 24 jets in the commercial and business aviation markets respectively, in the quarter compared with 26 jets each in the year-ago period. Deliveries to the executive aviation market included 16 light and eight large executive jets.

Q2 Backlog

Embraer exited the second quarter with an order backlog of $18.5 billion, lower than the first-quarter level of $19.2 billion.

During the quarter, Embraer received orders and commitments from unidentified customers for E2 jets, the second generation of its E-Jets family of commercial aircraft. The customer ordered for 10 E195-E2 jets, including purchase rights for 10 additional jets. The company also received a commitment to purchase 20 E190-E2s from one more unidentified customer.

Moreover, Embraer obtained an order for two aircraft of the current generation of E-Jets – one E175 and one E195 – from Belavia and Belarus, respectively. Both the aircraft are scheduled to be delivered in 2018. Another agreement was signed with Japanese airline, Fuji Dream Airlines, for three E175 jets including purchase rights for three additional aircraft. The other orders include – an order for two more E190 jets for KLM Cityhopper - KLM's regional subsidiary; and a deal with Japan Airlines for more E190 jets.

Apart from this, Embraer signed a contract with the American Airlines Group for four E175 jets, valued at $182 million at list prices.

Long-Term Outlook

Embraer expects total market deliveries of 6,400–2,300 jets in the 70- to 90-seat segment and 4,100 units in the 90- to 130-seat segment by 2035. The 70- to 130-seat worldwide fleet in-service is anticipated to increase from 2,670 jets in 2015 to 6,690 by 2035, making it the fastest growing segment.

Meanwhile, The Boeing Company’s BA research report projects that the world will need 41,030 new planes, worth $6.1 trillion between 2017 and 2036. The company expects single-aisle jets to be the major driver behind demand growth, comprising 72% of the total projection. This translates into worldwide demand for 29,530 single-aisle jets, worth $3.2 trillion, in the next 20 years. Additionally, Boeing anticipates the commercial fleet to be fuelled by sustained 4.7% annual growth in commercial passenger traffic.

We note that the larger commercial aircraft category is already being dominated by aerospace behemoths Boeing and Airbus Group SE EADSY. Still the improved outlook for commercial jets is expected to boost growth for Embraer, going forward.

Q2 Order Details of Peers

Boeing’s second-quarter order details show that the company has booked 183 net commercial orders (accounting for cancellations). This reflects an increase from the year-ago figure of 171.

In the first half of 2017, Boeing booked 381 net commercial orders (accounting for cancellations). On the contrary, Boeing’s arch rival, Airbus Group,  registered net bookings of just 203 aircraft in the same period, trailing far behind it.

Moreover, Boeing delivered a higher number of planes to its customers across the globe. Specifically, it delivered 228 aircraft in the second quarter.

Price Movement

Shares of Embraer have lost 10.1% in the last one year against the Zacks categorized Aerospace–Defense industry’s gain of 26.7%. 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, carrying 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 estimates climbed 4.6% to $12.37, over the last 90 days.

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