Embraer (ERJ): Strong growth runway on robust backlog, traction of next-gen E2 jets
Embraer (ERJ): Interesting stock to watch
Published price: $24.40
Whether the Brazilian airplane maker can break into the Boeing-Airbus duopoly is unknown yet, but it is certain that Embraer is well positioned to benefit from its strong backlog and the traction for its next generation of small narrow-body jets – the E2 family.
A major deal with American Airlines valued at $7+ billion represents American’s largest-ever single order of E175s. Under the agreement, the airline has placed a firm order for 90 E175 jets with purchase rights for 43 additional jets. The firm orders will be included in the Q1-24 backlog. The E175 aircraft will be delivered with 76 seats in American’s standard dual-class configuration, as the airline plans to retire all of its 50-seat single-class regional jets by the end of the decade. Including the firm order, Embraer has sold a total of 837 E175 aircraft since 2013. The upgrades to the E175 have improved its fuel burn by 6.5%.
Even as the demand for E175 remains high, Embraer is pushing the idea of E195-E2 as a “small narrow-body" to complement the larger narrow-body craft from Airbus and Boeing. The E195-E2 has 120-146 seats vs. E175-E1’s 76-88 seats. Total E2 deliveries more than doubled to 39 jets in 2023. The efficient E195-E2 is profitable at a ~80% load factor, according to Chief Executive Francisco Gomes Neto in his ‘November-23 interview to Reuters. The company believes that E2 economics makes it ideal for mainline as well as low-cost carriers to expand connectivity into secondary cities. The number of cities without service or served less than once daily has increased from 49 in 2019 (pre-pandemic) to 85 in 2023. This alongside replacement opportunities for previous generation craft should be addressable by Embraer’s E2 family.
Embraer’s backlog rose to ~$18.7 billion in 2023, up ~$1.2 billion Y/Y and the highest since Q1-2018. For 2024, it expects Commercial Aviation deliveries of 72-80 aircraft, and Executive Aviation deliveries of 125-135 aircraft, bringing the total deliveries to 197-215 planes. At the midpoint, this represents a ~14% Y/Y increase over 2023 deliveries of 181 aircraft.
For 2024, the company expects to achieve $6-6.4 billion in revenue. This represents a ~18% growth (at midpoint of the guidance) from 2023 levels, as well as 13% growth from pre-pandemic revenues in 2019. Embraer also sees adjusted EBIT margin between 6.5% and 7.5% (vs. 6.6% for 2023). Significant deleveraging from ~20.7x in 2020 to ~1.4x in 2023 reflects an improved liquidity position. Embraer sees adjusted FCF of >= $220 million for 2024.
ERJ trades at ~0.73x forward sales, vs. its 5-year average of ~1.2x and the sector average of ~1.4x. A multiple rerating to just ~0.9x, could still imply ~20% upside potential from current stock price levels.
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