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Pioneer Investments Sold Out but You Should Buy This Stock

Gurus do not always make the right decisions. In other words, gurus may at some point sell out a position on a stock that is bound to grow. That is the case of Pioneer Investment and Empresa Brasileira de Aeronautica (ERJ) who dropped the stock last December. Since then, the stock price has been on the rise and a special dividend ($0.09) payout was announced last Monday. Also, the company released the fiscal 2013 report at the end of February stating that main 2013 guidance figures, including aircraft deliveries, total revenues, as well as EBIT and EBITDA margins, were met. Results were achieved thanks to aircraft deliveries and growth in the firm's Defense & Security segment.

Today, the gurus holding the largest stock positions in the company are Charles Brandes (Trades, Portfolio) and Ken Fisher (Trades, Portfolio). Can Embraer continue on the growth path?

Planned growth

Growth rarely is accidental, and Embraer has delineated a plan to achieve it. In 2014 Embraer expects total revenues to be between US$6.0 billion and US$6.5 billion, up from $5.9 billion to $6.4 billion for 2013 ($6.07 billion total revenue estimate fiscal 2013). The improvement is to be pushed by continued double-digit revenue growth in the Defense & Security segment, as the company progresses in its execution of existing programs, including the KC-390 as well as the Border Monitoring system, Super Tucano LAS program, and satellite programs.

In 2014 Embraer plans to deliver 197 to 217 airplanes, distributed among commercial (92 to 97), light (80 to 90) and large (25 to 30) executive jets. Nonetheless, such growth will be curtailed by a market in recovery. Specifically, pre-owned aircraft inventory and pricing are expected to continue pressuring new aircraft demand. Pressure that will reflect in a smaller margin for the commercial aviation segment, expected to be eased by improvements in the executive aviation segment.

Research expenditure is projected to decline $20 million, to a total of $80 million as new prototypes reach the production line. Meanwhile, $320 million will be destined to develop the E2 program, and complete the Legacy 450 and 500 executive jets. Hence, total research and development investment will near $650 million. This effort is aimed at backing the recently publicized aim of lowering seat kilometer costs to connect tier II and tier III towns to metros with the introduction of smaller jets.

Market Breakers

Growth can only be secured through the introduction of products that set a new market standard and challenges those at the top. By all standards, Embraer is a strong competitor but has yet to reach a dominant position in any of the segment it competes. However, a strong possibility is looming on the horizon with the introduction of the E-2 commercial aircraft. Reaching a dominant position is not automatic, but the product's quality has left competitors in the shadows.

Embraer's E-2 combines a set of characteristics that guarantee lower operational costs to flight operators. This is a strong competitive quality due to the rising operational costs derived from higher fuel prices and declining demand. Both issues are addressed by the model through fuel efficient and spacious cabins. SkyWest (SKYW), which operates as United Express, Delta Connection, US Airways Express, American Eagle and Alaska Airlines has shown the greatest interest for the model signing an order for 100 E175-E2 aircraft, with another 100 purchase rights. American Airlines has placed an additional order for 60 aircraft, with an option for another 90 units. Last, the company's E Family has entered the Russian market after two E-195 units were leased to Saratov Airlines.

Taking the Long Trip

Stock price is on the rise after a small decline, and currently trades at 30.4 times its trailing earnings, carrying a 60% premium to the industry average. That premium should not surprise or scare potential investors since the Embraer has improve revenues, net income, cash flow and operating margins for the third year in a row. So, the timing may not be the best due to the premium, but the last drop on stock price and future outlook offer long-term investors an interesting opportunity for profit.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

This article first appeared on GuruFocus.