Description
SELL at market
ERJ is currently popular because analysis expect a multiyear solid growth. For example, Morgan Stanley currently estimates growth of $3.30/share in 2001 and $4.25 in 2002 with further growth expected. Estimates presume continued strong orders for RJ's as well as successful launch of new 70 and 90 seat plane. these assumptions are questionable or doubtful. Following is bearish case for ERJ.
HUGE PENTUP DEMAND FOR RJ's. there was a pentup demand in North America for about 1500 RJ's from the major carriers. Most of these orders have already been placed with either ERJ or Bombardier (BRAD). There are probably a another 100 or so remaining at UAL/USAIR and AWA is rumored to be close to ordering a few this occurred with Mesa getting 40 planes CRJ's (BRAD's RJ) through affiliated carriers. There is no comparable pentup demand in rest of world. Europe's orders from major carriers has been in lots of tens versus hundreds in US. Asia is small. Conclusion is most pentup demand is already ordered.
SERIOUS LOSSES OF ERJ TO BRAD Recently, BRAD has beaten ERJ with Skywest (UAL affiliate), is rumored to lose to BRAD with AirWisconsin (UAL Affiliate), lost the entire RJ position to NWA, lost to Atlantic Coast (UAL affiliate). Only recent big order is to South African Air for 30 ERJ-135's, which is about $450mm order. Lost most of AWA to BRAD Sales to flacky third world carriers contain significan contingent liabilities as they can't pay for the planes and ERJ has to guarantee their payment performance to leasing companies.
LAUNCH CUSTOMER CROSSAJR IN TROUBLE In 1999, ERJ trumpeted the launch of their new 70 and 90 seat plane with Swiss based CROSSAIR. They are now in trouble and disturbingly have already pushed back existing RJ orders
DOUBTFUL MARKET FOR 70 AND 90 SEAT PLANE It is not clear who is logical user of this plane. Direct competition from Dornier which is offering an exact copy of both planes. Neither has any real orders. Boeing is desperate on the B-717 and Airbus on the A-318 program, both of which press on the 90 seat demand. ERJ recently lost 70 seat order to BRAD at AWA
DETERIORATION OF LOW COST ADVANTAGE TO BRAD ERJ and BRAD have similar 50 seat planes, with ERJ having sold selling ONLY because of their government subsidy called PROEX which effectively gave them a 20% cost advantage. BRAD tried to eliminate PROEX at WTO, which although WTO awarded to Canada, Brazil has ignored. Canada recently counter attacked with their own subsidy package eliminating the price arbitrage. This is why the recent losses of ACAI, Skywest and Air Wisconsin and AWA are so telling. If prices are comparable, ERJ will be left trying to do business with shakey foreign carriers with limited ability to actually pay for them.
Catalyst
Like all growth stories, failure to grow earnings is killer. This could take a year or so. Lack of recent new orders other than exagerated orders (pretending options are real orders for example) to marginal carriers will be a clue. Watch orders on new 70 and 90 seat program. Look for excess RJ;s out of ERJ by mid 2002, which will show lack of markets.