Embraer ERJ
August 15, 2000 - 10:54pm EST by
2000 2001
Price: 23.50 EPS 1.45
Shares Out. (in M): 67 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 650 EBIT 0 0

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Embraer is the world's fourth largest manufacturer of commercial aircraft. Headquartered in Brazil, their small (25-90 seat) jets have been selling like gangbusters since they rolled onto the market. Currently, their order backlog exceeds $22 billion U.S. In 1999, they delivered roughly $1.8 billion U.S. of aircraft to their customers. This represents more than 7 years of backlog, assuming that they can increase their production at a straight line 20% per year.

The demand for smaller regional jets is growing quite rapidly, due to the gradual changeover from "hub and spoke" flights to direct flights from city to city. Couple that with a need for more frequent flights, and more fuel efficient aircraft make Embraer worth a look. Worldwide air traffic is forecast to grow by more than 7% per year for the next decade, which places Embraer in a true "growth" industry.

What stands out about ERJ , in addition to its huge backlog, is its rapid increase in profits. Profits for the first six months of this year were the equivalent of $1.4 per ADR. This earnings increase matched the street expectations. Only two firms follow this stock at present, but more will certainly seek to include this stock shortly, to be sure.

For the previous two fiscal years, ERJ posted earnings surprises that beat the most optimistic expectations by over 20% in 1998, and 25% in 1999.
Their largest competitor is Bombardier. Embraer can consistently undercut BBD's prices (its largest competitor) for equivalen aircraft by 25%, while still maintaining 25% + p


Earnings this year should surprise on the upside, possibly as high as $3 U.S. per ADR. Selling for less than 10 times 2000 estimates and less than 8 times 2001 estimated, Wall Street will start falling all over this stock shortly. The stock was listed in July 2000 and now is very much the time to accumulate. Hold for at least five years.
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