We are maintaining our Neutral recommendation on Embraer S.A. (ERJ).
We are optimistic on Embraer’s efforts to improve productivity and efficiency alongside a firm order backlog. The company’s margin consistency and strict control over SG&A costs are commendable.
Embraer’s worldwide customer order servicing and on-time deliveries of corporate, defense jets and executive jet-support structures strengthen its global footprints. The company strengthened its position in the security solutions business across the Brazilian as well as other foreign governments generating healthy revenue across segments. We anticipate further expansion for the company across both commercial and defense aviation market in the coming quarters.
The company continues to invest in the global support network incorporating new service centers and dealers. All such strategic deals and partnerships are anticipated to lend more stability to the company’s investment stream and ensure future growth.
However, Embraer operates in a commercial aircraft manufacturing industry, which is highly competitive. Thus, the company requires continual technological and performance enhancement to keep up with the growing demand in the commercial aircraft manufacturing market. Such measures for retaining market share and remain competitive involve recurring costs.
Rising expenses have been a nagging concern for Embraer with cost of sales and services staying on the upside over the last few quarters. Administrative, selling and research expenses as well as fuel charges continue to exert pressure on operating margins, hindering growth.
Nevertheless, currency fluctuations, rising wages and heavier tax burden aggravate margin pressure and continue to severely impact the company’s earnings growth.
Brazil-based Embraer’s product portfolio supports strong customer orders worldwide. Its diversified global footprint offers fierce competition to industry operators of the likes of Boeing Co. (BA), Erickson Air-Crane Incorporated (EAC) and Northrop Grumman Corporation (NOC).
The company currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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