Brazil’s EMBRAER on upward path after Covid crisis and Boeing rejection

RIO DE JANEIRO, BRAZIL – The storm EMBRAER experienced in 2020 was a violent one. Few companies suffered as much as the aircraft manufacturer, which saw demand in the sector plummet while its customers parked their fleets worldwide as countries implemented social distancing measures to contain Covid.

Two months after this crisis began, the company suffered another blow, with Boeing dropping its bid to buy its commercial aviation division. The result was a 55% drop in EMBRAER shares and a R$1.5 billion (US$281 million) loss for the year.

But as fast as it sank, EMBRAER seems to be rebounding. Last year, while still in the midst of the pandemic, the company posted a quarterly profit (between April and June) – which hadn’t happened since the same period in 2018. It also posted the highest rise on B3. While Ibovespa fell 12% in 2021, EMBRAER rose 180%.

Although at the beginning of 2022, the company’s performance in the Stock Market is negative, with an accumulated drop of 23.5%, the mood among the company’s analysts is optimistic. XP sees potential for the shares traded in Brazil to increase in value by 44%. As for stocks traded in the United States, Itaú believes there is room for an increase of 47% by the end of the year; BTG considers 40% and Citi 22%.

“What I find positive is that I don’t see the current share price reflecting, simultaneously, the resumption of commercial aviation and the innovation with the ‘flying car’. Maybe one of these factors is in the price, but not both,” says XP analyst Lucas Laghi.

COMMERCIAL AVIATION

The worldwide rebound of commercial aviation was led by the regional market, of aircraft with up to 150 seats and in which EMBRAER is the leader. With capacity for 88 seats, the E175 model has virtually no competitor today. In 2020, the worst year of the pandemic crisis, 73% of commercial aircraft delivered by the company were of this model. In the first 9 months of 2021, this share fell to 47%.

“EMBRAER has great exposure to the regional market and it holds the leadership with the E175 in the U.S., one of the largest domestic aviation markets,” says Itaú BBA analyst Thais Cascello.

The global upturn in commercial aviation has benefited not only this segment of EMBRAER, which currently accounts for a third of revenues, but also the company’s service division, since the need for airlines to maintain their aircraft has increased. EMBRAER’s service and support area is the one with the highest profit margin and its share in revenue generation rose from 22.5% in 2019 to 28.5% in the first 9 months of 2021.

In the defense segment, the billion-dollar C-390 Millenium project (a military freighter, the largest aircraft ever developed by the company) has been completed and ceased generating expenses. Now, it is expected to bring in revenues. However, the market expects this division to have an increasingly smaller share in the company – from January through September 2021, it stood at 16.5%.

On the other hand, the executive aviation area has enjoyed consolidated growth, particularly because EMBRAER has chosen the right product portfolio. “The margin has been constantly improving,” Itaú’s Thais says. In the last quarter of 2021, the segment’s revenue rose 17%.

COSTS

In addition to the favorable winds in all its divisions, EMBRAER has also become more efficient, trimming costs. This year, it announced the sale of two plants in Portugal, which, according to company CEO Francisco Gomes Neto, were inefficient. Earlier, it had renegotiated contracts and dismissed 2,500 employees (15.6% of the Brazilian staff).

To complete the scenario, the eVTOL (electric vehicle for vertical take-off and landing, as the “flying car” is officially called) has become the big bet for the future of aviation, and EMBRAER is among the most promising in the area. Last June, when the news was confirmed that Eve (the EMBRAER company that develops the project) would merge with American Zanite to go public on the New York Stock Exchange, EMBRAER shares jumped 15.6% in a single day.

“As the more traditional businesses are doing better or are not causing as much of a headache for investors, the market felt more comfortable pricing eVTOL. Perhaps, if the traditional business had not been doing so well, the class would not be so inclined to buy a new business that still needs to prove itself,” adds the Itaú analyst.

EMBRAER’s CEO believes that the projects to improve the company’s efficiency and the “flying car” are the most important factors that have driven the company forward. Gomes Neto says that for the company’s shares to rise as the market expected, consistency in the work will be necessary. “We need to deliver what we promised, as we did until the third quarter of 2021.” And this is no small promise. By 2026, the executive intends to almost double EMBRAER’s revenue, compared to 2020.

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