What's that in the sky? Is it a bird? A comic-book superhero? No, it's Brazilian plane-builder and Motley Fool Stock Advisor recommendation Embraer (NYSE:ERJ), preparing to land tomorrow afternoon with a cargo of Q1 2006 earnings news.

What analysts say:

  • Buy, sell, or waffle? Ten analysts keep Embraer on their radar. Of these, six rate the stock a buy, three a hold, and only one a sell.
  • Revenues. Analysts are looking for 6% year-over-year improvement in sales, to $805 million.
  • Earnings. Profits are predicted to dip 9% to $0.50 per ADS.

What management says:
In April, Embraer announced that it had delivered 27 jets to various customers in the first quarter. These deliveries comprised 21 commercial jets (including nine total of the new ERJ 175 and ERJ 190 models), four business jets, and two jets delivered to government buyers. The 27 deliveries represent a 10% decline in deliveries against Q1 2005. Even so, given the analysts' expectation of a 6% increase in revenues, it seems that Embraer managed to sell more expensive, and hopefully higher-margin, jets this quarter than one year ago.

The company further advised that it intends to make 145 total deliveries this year, or four more than last year. The target for 2007 is expected to be 150 deliveries. Farther out still, Embraer confirmed that Midwest Express (NYSE:MEH) has canceled a May 2001 order for 20 ERJ 140 aircraft. However, the cancellation won't affect Embraer's anticipated delivery totals for 2006 or 2007.

Shifting back to the near term, in the Q2 2006 that has already begun, Embraer delivered 50 of its new Phenom 100 business jets to Geneva-based JetBird, which has an option to purchase 50 more Phenom 100s, or 50 Phenom 300s (also a new model), at JetBird's discretion. Phenom 100s list for $2.8 million apiece, so the total potential contract value is $280 million.

What management does:
Embraer's recent success in selling its new models, from the commercial ERJ 175 and 190 to the new Phenoms, may help to reverse the slide in gross margins that we've seen over the past 18 months.

Margins %

10/04

1/05

4/05

7/05

10/05

1/06

Gross

33.6

34.1

34.6

34.4

32.9

30.2

Op.

15.1

15.7

14.4

14

14.7

13.2

Net

11.6

11.1

10.4

10.9

10.4

11.6
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

The Fool says:
According to Motley Fool Stock Advisor co-analyst David Gardner, the slide in gross margins shown above isn't entirely Embraer's fault. Much of the margin slide is due to recent appreciation of the Brazilian currency. Investors should take heart, though: As David mentions in his most recent update on the company, if airlines keep pursuing "smaller, more efficient, and more profitable aircraft, [then] Embraer should continue to benefit from a very strong tailwind."

To that, I'd add only that Embraer is working pretty efficiently itself. With gross margins sliding, the firm picked up the slack, keeping much of that erosion from falling into the operating-margin line of the above chart. Over the past six months, sales increased 20% year over year, but Embraer's operating costs actually declined by 13%. If it can keep up that performance as sales of newer plane models start fattening its gross margins, the effect on bottom-line profits could be significant.

If you're interested in reading the entire update on Embraer and the other Stock Advisor picks, as well as Tom and David Gardner's original analysis for the recommendations, click here to take a free 30-day trial.

Competitors:

  • Boeing (NYSE:BA)
  • General Dynamics (NYSE:GD)
  • Lockheed Martin (NYSE:LMT)
  • Northrop Grumman (NYSE:NOC)
  • Raytheon (NYSE:RTN)

Fool contributor Rich Smith does not own shares of any company named above.