Embraer Revs Its Earnings Engine

Last month, I wondered whether Brazilian jet maker Embraer (NYSE: ERJ  ) would fly. Turns out that was the wrong question. I should have asked just how high this Motley Fool Stock Advisor pick would soar.

Second-quarter results are in, and most systems are flashing green. Sales rose 26% to $1.02 billion. Net income improved 68% to $139.1 million. And that's despite an 11.7% average gain of the Brazilian real over last year's Q2. (Embraer recorded a $4.2 million charge for currency effects on its income statement.)

The jet maker's only noticeable blemish is an increased price of doing business. Gross margin declined 3.1% year over year and 500 basis points sequentially. Management attributed the shortfall to both currency effects and the cost of bringing the E190 and E195 regional jets to market.

That makes sense. Embraer faced a similar ramp-up period with its E145 jets in years past. Besides, aircraft deliveries are accelerating; the company delivered 36 jets during this year's Q2 versus 30 during last year's second quarter.

If there's a cause for real concern, it's Embraer's backlog, which declined from $10.9 billion in Q2 2005 to $10.2 billion by the end of June. That wouldn't matter much except that both inventory and receivables declined year over year, which suggests that commercial carriers, who account for roughly 70% of Embraer's sales, aren't ordering as much as they used to. A check of the June backlog report confirms this -- firm orders for the E170 and E190 families dropped from 346 last June to 292 as of the recently completed Q2.

Still, there's no need to go grabbing for the oxygen mask. Even if commercial carriers are tapping the brakes on buying, they're spending more on Embraer's newer E-jets. Better still, business jet sales are on the rise: Executive aircraft orders accounted for 8.8% of sales in Q2, up 1.5% over last year. Both are very bullish signs, yet investors, who've priced these shares at roughly 10 times projected earnings, haven't noticed. Color the value investor in me thrilled.

Strap yourself in. It's time to taxi toward related Foolishness:

Embraer and JetBlue are both Motley Fool Stock Advisor selections. Ask for us anall-access pass, and you'll get a backstage look at all of the stocks that are helping David and Tom Gardner beat the S&P 500 by more than 35 percentage points as of this writing. Go ahead; your pass is free for 30 days, and there's no obligation to buy.

Fool contributor Tim Beyers wonders what first class would be like on an E190. He hopes to find out before too long. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get an inside peek at all the stocks he owns by checking Tim's Fool profile. The Motley Fool's disclosure policy is always on time for departure.


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