Is Embraer Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Embraer (ERJ +1.85%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Embraer's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Embraer's key statistics:

ERJ Total Return Price data by YCharts.

Source: YCharts. * Period begins at end of Q1 2010.

ERJ Return on Equity data by YCharts.

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we're going
Embraer doesn't look very strong today with only three out of nine possible passing grades. Maintaining its dividend has actually hurt Embraer's score, since it's been forced to reduce payouts -- and its negative free cash flow still can't support that payout at present at any rate. Yet despite this general weakness, investors have been flocking to the aircraft manufacturer recently. Is that optimism justified? Let's dig a little deeper.

This year has been one of big deals and big rumors for Embraer. Just a few days ago, the company announced a deal with American International Group's (AIG +1.41%) airplane leasing subsidiary for at least 50 jets and potentially up to 100, beginning in 2018. It's a multibillion-dollar deal that could be worth more than Embraer's entire trailing-12-month revenue stream. Embraer also has a deal with Republic Airways (NASDAQ: RJET) for at least 47 E-175 jets -- the first of which should be delivered around this time of year -- and potentially 47 more if the airline likes what it sees. Several major carriers are also looking to expand their fleet of regional jets, which is Embraer's specialty and thus also its great opportunity. SkyWest (SKYW +2.59%) is also committed to buying 40 of the E-175s and could buy up to 140. Between these three deals, Embraer's backlog should swell considerably.

Embraer's even getting some help from rival plane maker Boeing (BA +1.62%) in military sales. Embraer will rely on Boeing to market its KC-390 aerial refueling craft, which can also seat 80 people or carry nearly 24 tons of cargo. It's purportedly the largest aircraft ever built in Brazil, and its versatility should make it appealing to the world's modern air forces, which are estimated to want approximately 700 KC-390s. However, Embraer may be in for some frustration in the defense segment, as its joint contract with Sierra Nevada to supply the Air Force with 20 Light Air Support craft has been protested by rival contractor Beechcraft.

On the other hand, Embraer may be fighting against the carrier current, which my fellow Fool Adam Levine-Weinberg says is moving in the direction of larger planes. JetBlue Airways (JBLU +11.93%), one of Embraer's prime customers, is about to start flying some larger Airbus 190-seat craft and will reduce the size of its Embraer 100-seat fleet to accommodate the new planes. For now, it looks like Embraer has more opportunity

Putting the pieces together
Today, Embraer has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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