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Stock Analyst Update

A Hard Landing for Embraer

This year continues to look like a transition one with lower year over year profit margins, as the narrow-moat firm moves the new E2 jets into production.

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Narrow-moat  Embraer (ERJ) reported 2017 results that missed consensus expectations and guidance by a wide margin. Despite the weak end to the year, management reaffirmed 2018 guidance. This year continues to look like a transition one with lower year over year profit margins, as Embraer moves the new E2 jets into production. The E2 will account for about 10% of deliveries in 2018 and initial margins on these aircraft will be in the low-single digits. The E2 combined with lower legacy E jet deliveries and flattish business jet deliveries will weigh on sales and profitability throughout 2018. None of this is news and we think the weak performance in the last quarter of 2017 presages the E2 transition. As a result, we’re maintaining our fair value estimate of $26 per ADR.

Revenue in the quarter at $1.73 billion was down nearly 15% versus the fourth quarter of 2016 with lower sales across all business segments. Adjusted EBIT, which excludes certain nonrecurring items, stood at $133 million in the quarter, translating into a 400-basis-point contraction in adjusted margins to 7.7%.

For full-year 2017, Embraer delivered 101 commercial aircraft (down 7 aircraft year over year due to lower E-175 deliveries) and 109 executive jets (down 8 aircraft year over year). On the back of these deliveries, 2017 revenue decreased 6% year over year to $5.84 billion. Adjusted EBIT stood at $397 million, which is well below the $450 million-$500 million range management had been guiding to for 2017. By way of comparison, management's midpoint EBIT guidance for 2018 stands at $312 million.  

Finally, Embraer didn't shed much light on its ongoing discussions with Boeing. We believe a JV focused on commercial aircraft remains the most likely outcome and we could see this linked with the launch of Boeing's possible next generation midsize aircraft. Embraer's stock has held most of its gains after the Boeing discussions surfaced; if the deal falls apart, we think shares would pull back a bit.

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Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.