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Here’s Why You Should Stay Invested in Embraer SA (ERJ)


With a rapid improvement in air traffic, demand for commercial aircraft has increased manifold in recent times, thereby providing an impetus to Embraer SA’s ERJ growth trajectory. The company continues to witness strong demand for E-jets, booking notable orders in almost each quarter.

Notably, low cost, fuel efficient and spacious cabins have made Embraer’s E-Jet commercial aircraft popular. The recent launch of the advanced E-2 commercial aircraft has further strengthened the company’s position in the commercial 70-130 seat market.

While E2 E-Jet (the E190-E2) is anticipated to enter service in April 2018, the E195-E2 is slated for 2019 and the E175-E2 for 2020.

The company’s Commercial Aviation revenues representing 64.6% of total revenues in the third quarter of 2017, improved 61.3% from last year.

Coming to its earnings performance, Embraeer delivered a positive earnings surprise in three of the last four quarters, with an average beat of 23.5%. Notably, the Zacks Consensus Estimate for the company’s earnings for 2017 is $1.81, reflecting an annual improvement of 14.6%.

However, Embraer’s Defense & Security business segment has been witnessing weak performance for quite some time. Notably in the third quarter, revenues from this unit declined 12% on year-over-year basis, as the company is still in developing phase under this segment.

Moreover, Embraer operates in a highly competitive commercial aircraft manufacturing industry dominated by aerospace bigwigs —The Boeing Company BA and Airbus Group EADSY — with a long operating history. As a result, Embraer needs to frequently upgrade its technology from time to time, apart from improving its performance to meet growing demand in the commercial aircraft manufacturing market. This in turn forces the company to incur huge costs.

Despite such stiff competition, the company continues to lead the 70- to 130-seat commercial jet market. In fact, the E-Jets commercial aircraft family achieved the impressive milestone of transporting 1 billion passengers worldwide, since its entry into service, during the third quarter of 2017.

This might have led to Embraer’s outperformance with respect to its broader industry in last six months. The company’s shares have returned 32.9% compared with the industry’s rally of 26.7%.

Zacks Rank & Key Pick

Embraer has a Zacks Rank #3 (Hold).

A better-ranked stock in the same sector is Spirit Aerosystems Holdings, Inc. SPR, which has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Spirit Aerosystems delivered an average positive earnings surprise of 4.52% for the past four quarters. The company has a solid long-term earnings growth rate of 10.8%.

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