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Embraer Climbs Back Despite Executive Aviation Uncertainty

By Dan Caplinger - May 12, 2016 at 2:00PM

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Higher revenue allowed the jet maker to reverse a year-ago loss, but shareholders haven't responded favorably.

Image source: Embraer.

The aerospace industry has gotten a lot of attention lately, and Embraer (ERJ 2.04%) is among a handful of companies that make regional jets and smaller aircraft for executive use. Even though the industry for commercial aircraft has been booming, many prospective customers have pulled back on capital expenditures. Coming into its first-quarter earnings report, Embraer shareholders had concerns about whether a possible downturn would hobble its growth. Even though the aircraft maker's revenue and earnings were stronger than most expected, the stock still didn't respond favorably. Let's take a closer look at the latest from Embraer and whether the future will get brighter for the company.

Embraer keeps gaining altitude fundamentally

Embraer's first-quarter results marked a nice turnaround from a tough quarter a year ago. Revenue of $1.31 billion was up 24% from year-ago figures, and that was far better than the $1.24 billion consensus estimate among those following the stock. Similarly, net income came in at $103.9 million, reversing last year's loss of $61.7 million and working out to $0.57 per depositary share. That was nearly a quarter per share higher than most investors had expected.

A closer look at Embraer's results shows how different this year's quarter looked compared to the same quarter last year. In examining Embraer's segments, the commercial aviation unit enjoyed solid revenue growth of about 7%, representing more than half of Embraer's overall sales. But the smaller defense and security segment, which makes up about a seventh of the total business, did much worse, falling 11%. Executive jet revenue more than doubled from last year's exceptionally weak first quarter. Yet to put everything into perspective, all three numbers were much weaker than how Embraer did in the fourth quarter of 2015, raising concerns about a loss of sequential momentum.

The delivery numbers also verified the path that Embraer has taken. The company made 21 deliveries of commercial aircraft, including 19 E175 and 2 E195 models. That was up by a single plane from last year's first quarter but was down a third from fourth-quarter totals. Similarly, the 23 executive aviation deliveries from this year almost doubled last year's total, but it was barely half the 45 jets that the company sold in the fourth quarter. Backlogs finished at $21.9 billion, down $600 million from Dec. 31 but up $1.5 billion from the year-ago quarter.

Can Embraer climb higher?

Even with the better-than-expected performance, Embraer chose not to make any adjustments to its outlook on finances and delivery totals. The quarter's numbers were roughly consistent with the expected full-year deliveries of between 105 and 110 commercial jets, 115 to 135 business jets, and between $700 million and $750 million in revenue from defense and security.

More worrisome is the fact that Embraer is dealing with ongoing operating losses in its executive aviation unit. The main problem, according to company executives, is that the mix of jets sold includes a larger number of Legacy 650 aircraft. Those planes are older and carry less of a profit-making premium than newer aircraft do. That pulled margin figures down significantly and makes the expansion in jet sales less meaningful than it would be if it included a more representative mix of newer aircraft as well. Moreover, it's uncertain whether the company will be able quickly to move toward a healthier mix from a profitability standpoint.

Embraer stock fell about 5% on the day of the announcement, and since then, shares have given up another 4% to 5%. In order to bounce back, Embraer will need to work toward selling more high-end aircraft both to commercial and executive-aviation clients. Without that tailwind to push the company's results higher, Embraer might not be able to give shareholders the positive returns they deserve in the near future.

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