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Embraer Expects Headwinds for 2018

By Dan Caplinger - Oct 27, 2017 at 11:25AM

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Find out what's troubling the aircraft manufacturer despite solid third-quarter results.

Aircraft manufacturers have enjoyed huge demand lately, as a prosperous airline industry has been able to direct investment into improving aircraft fleets and finding more efficient ways to operate. That has been a boon for Brazilian manufacturer Embraer (ERJ 1.48%), which has positioned itself to capture business from its airline customers. Concerns about its home market of Brazil have arguably made Embraer an even better value from a shareholder perspective, especially as investors look forward to the ramp-up of new aircraft in the E2 product line.

Coming into Friday's third-quarter financial report, Embraer investors were ready for the volatility that can affect the company's results dramatically from quarter to quarter. Yet although Embraer's immediate results were solid, the aircraft maker warned that 2018 could present some challenges that not everyone seemed to have taken into account. Let's take a closer look at Embraer to see how it did and what's ahead for the company.

Embraer E2 commercial jet in flight over a scattered cloud layer near sunrise or sunset.

Image source: Embraer.

Embraer takes flight

Embraer's third-quarter results were mixed. Revenue was down substantially, falling 13% to $1.31 billion, which was a slightly steeper descent than most of those following the stock had anticipated. However, adjusted net income was strong, nearly doubling from year-ago levels to $75.2 million, and the corresponding adjusted earnings of $0.41 per share were above the consensus analyst forecast for $0.32.

The executive jet segment was the primary driver in pushing Embraer's revenue down year over year. Segment sales fell by more than a quarter, reflecting weaker delivery counts. Embraer kept its light jet deliveries unchanged at 13 compared to the year-ago period, but large jet deliveries fell sharply from 12 to seven.

Meanwhile, other segments saw slightly better performance. The commercial segment saw deliveries of 25 commercial aircraft, down from 29 in the year-ago quarter, but the mix was somewhat more favorable in emphasizing newer models like the E190 and E195. Overall segment revenue was still down 9% from the previous year. Defense and security revenue was down 12%, even though the company has worked hard on several aircraft programs that have considerable potential to deliver growth.

Can Embraer hold altitude?

Yet the biggest news that Embraer gave had to do with its outlook for 2018. The company said that it expects 2018 to be a "transition year" as production ramps up for its E190-E2 model. Embraer hopes to have the E190-E2 into service next April, to be followed by the E195-E2 in the first half of 2019 and the E175-E2 in the first half of 2021. The company reminded investors that aerospace industry time frames typically include one to two years after development during which production and sales activity build toward peak efficiency. As a result, Embraer thinks that commercial jet deliveries will decline to between 85 and 95 jets during the transition.

Elsewhere, Embraer is cautious but optimistic. The aircraft manufacturer sees production building for its KC-390 cargo and transport jet in defense and security. It also hopes that new executive jet deliveries could be flat to up slightly during 2018, with guidance for between 105 and 125 jet deliveries during the year. Embraer continues to expect that it will cater to higher-end customers by emphasizing service and comfort, even if it means higher price points for purchasers, but the company will also work to control costs. Overall, Embraer predicted revenue of $5.3 billion to $6 billion, with pre-tax income of between $265 million and $360 million.

Embraer shareholders seemed nervous about the transition, and the stock fell 3% in pre-market trading following the announcement. Yet if the E2 series does well, any short-term pain the aircraft manufacturer feels should be rewarded with better performance in the long run.

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