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Embraer Is Poised to Beat Its Delivery Guidance

By Adam Levine-Weinberg - Jan 11, 2016 at 8:45AM

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Investors aren't giving the Brazilian aircraft manufacturer enough credit.

Last week, Boeing (BA 1.26%) reported that it had ended 2015 with 762 aircraft deliveries for its commercial airplanes business. This number beat Boeing's October guidance for 755 to 760 deliveries, which was already ahead of its original guidance for 750 to 755 deliveries in 2015.

This week, Brazilian aircraft manufacturer Embraer (ERJ 4.22%) is likely to report its own guidance beat. Because Embraer is a much smaller and simpler company than Boeing -- it has fewer product lines and a smaller customer base -- it's possible to get a very good sense of how many planes it has built and delivered.

Orders rising -- guidance stays flat
Embraer entered 2015 projecting that it would deliver 95 to 100 commercial jets during the year, up from 92 in 2014. It secured a slew of orders during the year, achieving a book-to-bill ratio of more than 2.0 through September.

Embraer bagged a ton of new orders during 2015. Photo: Embraer.

Several of these orders called for deliveries to begin in 2015. Yet Embraer never increased its delivery guidance, suggesting some degree of conservatism in its forecasts.

Through the first three quarters of 2015, Embraer delivered 68 commercial jets: 62 E175s, three E190s, and three E195s. Based on publicly available data, it appears that the company delivered at least 33 jets in the fourth quarter, putting it above the high end of its full-year guidance range.

Tracing Embraer's aircraft deliveries
Aircraft database provides relatively up-to-date information on the planes airlines are flying around the world, including delivery dates. Additionally, publicly traded airlines typically provide guidance about expected aircraft purchases. These data points make it possible to estimate how many aircraft Embraer delivered in Q4.

The top destination for Embraer planes lately has been the U.S. regional aviation industry. American Airlines stated in its Q3 SEC filing that it was scheduled to take delivery of nine E175s for its regional subsidiaries during Q4. Republic Airways also took delivery of six E175s during the quarter, Mesa Airlines received three, and SkyWest (SKYW 1.90%) accounted for another two.

In Asia, Japan Airlines subsidiary J-Air took delivery of two E170s during Q4. Embraer also had five deliveries in China: one E190 to Hebei Airlines, two E190s to start-up Colorful Guizhou, and two E195s to Tianjin Airlines.

In its home market, Embraer delivered four E195 aircraft to Azul Brazilian Airlines. Finally, in Europe, Embraer delivered two E190s to KLM Cityhopper.

Favorable mix
In total, I was able to find evidence of at least 33 deliveries for Embraer during Q4. That would put its annual total at 101 deliveries, just above the upper end of the company's guidance. This is the breakdown of Embraer's Q4 deliveries by model:











Not only did Embraer's deliveries surge last quarter, but it also benefited from a relatively favorable mix. The larger E190 and E195 models generate more revenue and also typically carry higher margins than the smaller E170 and E175 models. That should drive solid profit growth for Embraer in Q4.

Deliveries of the larger E190 and E195 models rose in Q4. Photo: Wikimedia Commons user Agencia Brasil.

Furthermore, about 30 of Embraer's outstanding orders at the end of Q3 were placed by aircraft leasing firms or undisclosed customers. As a result, Embraer may have delivered a few airplanes last quarter that I was unable to track.

Indeed, looking at the production line numbers for the E175 jets delivered in Q4, it appears that Embraer produced 22, rather than 20, E175s. It's possible that these extra two planes will be delivered in 2016 -- sometimes aircraft are delivered out of sequence. But it's more likely that these planes will show up in Embraer's Q4 delivery total.

Production could keep rising
Strong commercial airplane deliveries and Embraer's momentum in the executive-jet market give it a good chance of beating analysts' earnings estimates for Q4. Embraer is also in good position to continue growing its commercial aircraft business in 2016.

Indeed, SkyWest alone has placed orders for 30 E175s to be delivered in 2016, as U.S. mainline carriers are increasingly standardizing their regional fleets on this model. SkyWest has another 17 firm orders for delivery in 2017, and there is still plenty of time for it to add to its order book by then.

Including other regional airlines, Embraer is likely to deliver about 80 E175s in the U.S. this year. It will also deliver a handful of E175s to KLM Cityhopper in 2016. Smaller customers could account for several additional E170 and E175 deliveries.

On the large-jet front, Embraer probably ended the year with about 80 firm orders for current-generation E190 and E195 aircraft. Most of those will be delivered in the next two or three years.

Embraer is therefore likely to have at least 20 combined E190 and E195 deliveries in each of the next two years, which would be slightly better than its 2015 performance. This means there could be another step-up in production this year, perhaps to 105 to 110 commercial jets.

Despite this positive momentum, investors are avoiding Embraer. The stock trades for just 12 times forward earnings, compared with 14 times forward earnings for Boeing, which itself is quite cheap. As Embraer returns to strong profit growth in the next several quarters, the stock is likely to rebound to a much higher valuation.

Adam Levine-Weinberg owns shares of Embraer-Empresa Brasileira and The Boeing Company and is long January 2016 $30 calls and July 2016 $25 calls on Embraer-Empresa Brasileira. Adam Levine-Weinberg is long January 2017 $30 calls -- and The Motley Fool is long January 2017 $35 calls -- on American Airlines Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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