Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Time to Buy Embraer?

What a difference a mega-order makes! Recently, I discussed Embraer's (NYSE: ERJ  ) disappointing first quarter in light of its long-term prospects. At the time, I put forward that if Embraer could add another $1 billion-$2 billion in orders to its backlog, a missing puzzle piece would fall into place, making this company a persuasive investment candidate. Last week's announcement of a significant order from regional airline SkyWest, (NASDAQ: SKYW  ) , provides a $4.1 billion jigsaw cutout to complete Embraer's picture.  

Details of the deal
SkyWest has given Embraer a firm commitment for 40 E-175 "E-Jets". These planes will be added to Embraer's second-quarter 2013 backlog. At the end of the first quarter, the backlog stood at $13.3 billion. The next 60 planes to be produced (which will bring the order total to $4.1 billion) are contingent upon SkyWest completing Capacity Purchase Agreements, or CPAs, with various airlines. SkyWest is a regional carrier for airlines such as Delta, United, American Airlines, and US Airways. It operates under many of these airlines' familiar express brands, including Delta Connection, United Express, American Eagle, and US Airways Express. SkyWest also has the option to purchase 100 additional E-175s. If exercised completely, the options would increase the current deal total to $8.2 billion.

Relevant big picture items
The 40 planes which constitute the first portion of this order will all be dedicated to United Continental's (NYSE: UAL  ) United Express. This is on the heels of a United order for 30 E-175s a few weeks ago, which will also fly under the United Express livery. The two orders together represent a significant investment by United in the fuel-efficient E-175 platform, but it's spreading the financial risk by owning 30 planes outright on its books, and purchasing capacity from SkyWest, which will have title to 40 planes.

Another interesting point, noted last week by The Wall Street Journal, is that you can read Embraer's influx of new orders, along with other anecdotal information in manufacturing, as a portent of global economic recovery. This is because regional travel of the kind that Embraer's smaller E-175 jets enable is associated with both increased corporate trade and tourism.

Bulking up the pipeline
Embraer's big SkyWest order will increase its order backlog significantly. Latin American investment banking firm BTG Pactual estimates that the first 100 planes, if fulfilled, will increase Embraer's total backlog by 20%. An increase of 20% would bring Embraer's backlog to roughly $16 billion. If you doubt the power of a robust order backlog, look no further than Boeing (NYSE: BA  ) . At $392 billion, Boeing's total order backlog is roughly equal to the GDP of South Africa. The long cue of orders served as a primary support for Boeing's stock price when the new Dreamliner 787 was grounded for 123 days earlier this year. In fact, Boeing's stock is up roughly 27% year to date. A substantial dollar amount of orders in a company's pipeline can help insulate it from near-term problems in the eyes of investors. Now, Boeing has one of the largest sales backlogs of any company in any industry. How does Embraer's backlog compare to Boeing's? We can level the comparison if we consider each company's backlog in relation to current annual revenue:

Company Backlog Annual Revenue Backlog/Revenue
Boeing $392.00 $81.20 4.8
Embraer $15.97 $6.11 2.6

Source: SEC Filings, company press releases, and author calculations. All dollar figures in billions.

As you can see, Boeing's backlog is roughly equal to five times its annual revenue.* Accounting for the new SkyWest order (and assuming that the first 100 planes are fulfilled), Embraer's backlog stands at 2.6 times annual revenue. Posting a metric that is more than 50% of Boeing's in this category is no small feat. Maintaining this metric at the current level for the next several quarters will be a sign of sustained financial strength for Embraer.

A decent entry point
Despite Embraer's poor first quarter of 2013, in which net income declined 70% from the prior year's comparative quarter, the company now has some momentum behind it which should help it outperform. While its trailing-12-month P/E ratio seems high at 24.3, I believe this is largely a function of the stock price holding up even in the light of disappointing earnings. As Embraer's earnings improve over the next year, this ratio will likely normalize, and it may even increase slightly. For those who were inclined to buy Embraer but were waiting for a rebound, this is not a bad time to start constructing a position.

Boeing operates as a major player in a multi-trillion-dollar market in which the opportunities and responsibilities are absolutely massive. However, emerging competitors and the company's execution problems have investors wondering whether Boeing will live up to its shareholder responsibilities. In our premium research report on the company, two of The Motley Fool's best minds on industrials have collaborated to provide investors with the key, must-know issues surrounding Boeing. They'll be updating the report as key news hits, so don't miss out -- simply click here now to claim your copy today.

* Incidentally, this calculation is similar to, but not the same as the "Sales/Backlog Ratio,"  which is a predictor of future sales and uses quarterly revenue in its numerator.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2454698, ~/Articles/ArticleHandler.aspx, 9/26/2016 10:27:41 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 hour ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:01 PM
BA $130.57 Down -1.21 -0.92%
Boeing CAPS Rating: ****
ERJ $17.95 Down -0.62 -3.34%
Embraer-Empresa Br… CAPS Rating: ***
SKYW $26.01 Down -0.37 -1.40%
SkyWest CAPS Rating: ***
UAL $49.45 Down -1.50 -2.94%
United Continental… CAPS Rating: **