SINGY - Embraer Stock: Strong Buy After Wins In Asia

2023-06-01 17:41:28 ET

Summary

• Embraer booked progress in expanding customer footprints in Asia and the Middle East.
• Berkshire Hathaway-owned NetJets ordered a large quantity of executive jets.
• Embraer is paving the way for better, streamlined performance in defense.

Last month, I discussed the Embraer (ERJ) quarterly earnings. In response to the earnings release, Embraer stock tanked 9%. While the results were certainly not impressive, I also did not see a justification for the sell-off other than profit-taking. Since then, the stock has strongly rebounded and there also have been some important milestones for the defense, executive aviation, and commercial aviation segments which I will discuss in this report.

Embraer Opens Gripen E Production Line

Saab, which I previously covered as well, and Embraer have been intensifying their cooperation on defense platforms for years. In April, the companies signed a Memorandum of Understanding to deepen the collaboration, positioning the C-390 tactical transport airplane as the preferred candidate to meet the Swedish Air Force lift requirements and Gripen sales in Latin America. In May, Embraer's Gripen E production line has been inaugurated, which is a perfect demonstration of technology transfer and the ties between both companies. In 2014, Brazil bought 36 Gripen fighter jets of which 15 will be produced in Brazil and another 30 fighter jets might be ordered by Brazil. The defense business of Embraer is one that has posts fluctuating results, driven by variability in sales for the Super Tucano used for reconnaissance missions and lower demand for the KC-390 from the Brazilian Air Force. So, the ties between Saab and Embraer are of key importance to achieve better, streamlined results in the defense business.

Executive Aviation: Embraer's Praetor 500 Scores Big

Probably the best testimony of customer satisfaction: Recurring orders, and that's what Embraer achieved with its sale of up to 250 jets worth over $5 billion according to base prices. The partnership between Embraer and NetJets owned by Berkshire Hathaway (BRK.A) ( BRK.B ) goes back to 2010 when the company ordered up to 125 Phenom 300 jets with a follow-up order for 100 Phenom 300/E jets in 2021. With a backlog of $4.1 billion before the order and up to 130 jets expected deliveries this year, the order from NetJets for up to 250 jets valued over $5 billion when fully exercises is significant.

Momentum In Asia For Commercial Aviation

Just like for single aisle and wide body jets, a major end market for Embraer is Asia. That, however, is an area where sales have not been collected at a fast pace. At the time, Airbus ( OTCPK:EADSF ) took its A220 to Indonesia for a demonstration to Lion Air, Embraer also had some Asia-focused activity. The company brought its Embraer E195-E2 to Langkawi while displaying its short runway performance in South Korea some days later using an Embraer E190-E2. It fits in campaigning that Airbus and Embraer have both been engaged to gather sales in Asia, which in an upbeat scenario provides the possibility to see some Asian order activity for the jets during the Paris Airshow that will take place later this year.

During the month, Indian Star Air commenced commercial flights on its first E175 jet. Furthermore, Embraer announced a flurry of future Asian operators. In 2022, lessor Azorra placed orders for 20 Embraer E2 family airplanes, with options to extend that number to 30 airplanes. Malaysian SKS Airways will be leasing 10 E195-E2 from Azorra and Scoot, part of Singapore Airlines Group ( OTCPK:SINGY ) will be leasing E190-E2, while Royal Jordanian Airlines will be leasing two E195-E2s from Azorra and purchase four E190-E2s directly from Embraer. So, there are a total of 21 lease placements while Azorra has 20 airplanes on order, of which at least three are known to have been leased to Madagascar Airlines. This suggests that Azorra will order additional airplanes from Embraer, possibly with an announcement during the upcoming Paris Airshow.

The lease to Scoot can be seen as a wider restructuring of the Singapore Airlines fleet as it shapes for the future. Earlier, the company cancelled orders for eight Boeing ( BA ) 737 MAX airplanes and converted orders for three Boeing 787-9s to Boeing 787-10s.

Upward Pressure On Embraer Stock

When I analyzed Embraer earnings, the stock was down for reasons I don't quite understand. It seemed like an overreaction to me, partially caused by last year's strong one-off performance not being announced as such. I put a Strong Buy rating on the stock, and positive order news has really helped. Since attaching a Strong Buy rating to the stock, prices more than recovered with a 16.4% increase, significantly outperforming the markets. Aerospace can be extremely challenging to analyze, but I would say with proper analysis and due diligence you can align yourself with market-outperforming returns.

I recently launched the evoX Financial Analytics tool, which is the first version of my stock valuation tool that users can interact with for a growing number of stocks. For Embraer, the stock price target would be around $19 based on 2023 earnings and $22.34 based on 2024 earnings. So, I continue to see significant upside for Embraer stock from current levels, even after the recent upward pressure on the stock price.

Conclusion: Embraer Enjoys Investor Interest

After the earnings sell-off, Embraer stock did shine bright once again helped by some positive order news for all its segments, and I believe there's more growth ahead. The turboprop project that Embraer had envisioned is something that won't be launched for years according to the latest indications, but I do believe that the Embraer E2 has a significant growth path ahead and its Executive Jets order from NetJets is very encouraging.

The PW-powered Embraer jets are suffering from issues with the geared turbofan as I discussed recently, but since both the Airbus A220 and Embraer E2 are powered by the GTF I do not see an adverse impact on Embraer over the long term.

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