Embraer Will Rally
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Embraer (NYSE: ERJ) is the world's top manufacturer of midsize aircraft. Production of regional jets has been strained lately by high fuel costs and slow global recovery, but eventual uptick could lead to a rally point for the company and its shares. ADR's of Embraer have increased 29% already this year. Embraer is the world's third largest commercial aircraft maker, trailing behind Boeing (NYSE: BA) and EADS' Airbus. But the fact that it is trailing simply means that it has more room to expand and grow. Embraer appears to be seizing the opportunities that lay ahead.
Embraer has tremendous growth potential and could experience 30 - 40% growth in stock price in two to three years. The Brazilian aircraft manufacturer is expecting orders to pick up modestly in 2012. Embraer has a 43% share in the regional jet market and expects to benefit from future urbanization in the developing world. Embraers have the reputation for being the more dependable regional jet. They do not require repairs or maintenance work nearly as frequently as competitor Bombardier's CRJ.
Embraer is also seeing more defense-sector orders, a more stable cash business with better margins. Currently Latin America generates 50% of the defense sector's revenue. As Embraer swings more steadily into this sector, it will provide a major uptick in revenue and stock price. Boeing, one of Embraer's largest competitors, already takes advantage of this cash business. Boeing actually separates its company into two business. There is Boeing Commercial Airplanes and Boeing Defense, Space, & Security. Boeing is forever expanding into new markets through its defense branchoff. They spend countless resources on research and developement and it is all worth it when the revenues come in.
Embraer's price does not currently reflect the potential upside to earning from certain developments. The Brazilian government will be cutting payroll taxes and subsidizing loans to Brazilian manufacturers starting in July, which could boost 2013 earnings by up to 40 cents per share. Also, earnings and margins could get a lift if the Brazilian real currency weakens from its current high levels. All of these things will work together to bring Embraer new profits and revenue. Also, if the aircraft maker continues its merger into the defense sector could bring about untold profits for the company. The aircraft manufacturer has the potential to have some great years ahead of it.
MaryPosey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Embraer-Empresa Brasileira. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
