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Embraer, Arab Wings Cut Lineage 1000 Deal

Zacks Equity Research

A unit of the largest Brazilian aircraft manufacturer – Embraer SA (ERJ) – Embraer Executive Jets has entered into an agreement with Arab Wings for the sale of its ultra-large Lineage 1000 aircraft at the ongoing Dubai Airshow.

The Lineage 1000 is the flagship of Embraer Executive Jets' seven-aircraft portfolio. The delivery of the aircraft is slated for the first semester of 2014. This business jet has room to accommodate 19 passengers with five distinct and spacious cabin zones. It can fly 4,400 nautical miles (8,149 kilometers). The Lineage 1000 will join a super midsize Legacy 600 and large Legacy 650 already on Arab Wings’ fleet.

Embraer is the world's third largest commercial aircraft manufacturer following The Boeing Co. (BA) and Europe's Airbus. The plane maker has delivered a total of 44 jets in the third quarter of 2013 ending Sep 30, 2013, which fell short of the 51 deliveries preceding. However, the quarterly deliveries exceeded the year-ago level of 40.

With rising demand for regional aircraft, Embraer’s firm order backlog totaled $17.8 billion as of the third quarter of 2013, reflecting an increase of 4.1% from the last reported quarter. This marked a four-year high in the company’s backlog history.

The company demonstrated weak performances during the third quarter, yet maintained its outlook for 2013. The company reaffirmed its 2013 guidance and expects to meet the low end of its delivery target. It expects Defense & Security and Executive Aviation segments to represent a larger portion of the total revenue in 2013 compared with 2012.

Although deliveries were higher year over year in the third quarter, it was not up to expectations. A poor mix consisting more of executive jets and smaller aircraft cut into profit margins. Again, it had earlier projected delivery of 90 to 95 commercial jets, 80 to 90 light executive jets and 25 to 30 large executive jets this year. Hence, Embraer will have to deliver 32 to 37 jets in the fourth quarter to meet its guidance of 90 to 95 commercial jets for the year, which indeed is a tall task.

We believe this substantial deal, along with a series of contracts and tie-ups with several companies for its jets, will eventually boost the performance of Embraer’s commercial aircraft division.

Embraer SA has a Zacks Rank #4 (Sell). However, there are other stocks in the space that are performing well, with a favorable Zacks Rank. These are Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC), each with a Zacks Ranks #2 (Buy).

Read the Full Research Report on NOC
Read the Full Research Report on ERJ
Read the Full Research Report on BA
Read the Full Research Report on LMT

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