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2017.10.04 Penn Wealth Report Vol 5 Issue 02

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14 PENN WEALTH REPORT VOLUME 5 ISSUE 02 04 OCT 2017 PENN WEALTH REPORT Copyright 2017. All Rights Reserved. INVESTMENT INTELLIGENCE Embraer SA Aerospace & Defense The content of this report reflects the personal views, opinions, and recommendations of the individuals at Penn Wealth Publishing. While measures are taken to help assure the accu- racy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. Ask a chartered financial analyst which airline manufacturer they prefer, and odds are they will throw back an answer of either Boeing BA or Airbus EADSF . (Note: we currently own BA in the Penn Global Leaders Club). After all, with market caps of $140 billion and $67 billion, respectively, these are the two dominant players in the industry. Instead of looking at size as a positive attribute, however, inves- tors should consider what percentage of new orders for aircraft have already been baked into the current share price. Additionally, while giant boulders may move forward more predict- ably, they lack the dynamic ability to change speed rap- idly. Unlike, for example, a commercial aircraft manu- facturer with just a $3.777 billion market cap. Brazilian aircraft-maker Embraer SA ERJ may be inordi- nately smaller than its major competitors, but it is also more nimble, and it carries a much lighter debt load—two favor- able factors for investment. It also happens to be headquartered in an emerging market, offering some international flavor to portfo- lios dominated by US names. From tarmac to market leader A little over a decade ago, Embraer was an afterthought when it came to the lucrative executive aircraft market. Management's stra- tegic initiative to take on Textron (Cessna) and Canada's Bombardier in the space was a bold bet for the maker of commuter turboprops. Within a decade, however, the company was delivering more executive jets than either of its main competitors. Strong, bold leadership put them in that position. The regional jet market Not only is Embraer the new leader in the executive jet market, it has also garnered the title of number one producer of regional jets—aircraft seating between 70 and 130 passengers. In the late 1990s, the company made another brilliant strategic decision: build an all-new series of regional jets. The line manifested itself in the E2 series, with its 4th generation fly-by-wire (electronic rather than mechanical flight controls) archi- tecture, super-quiet cabins, and fuel effi- ciency. In 2018, the E190-E2 100 passen- ger jet hits the market, followed by the 130- seat E195-E2 in 2019, and the 80-seat E175-E2 in 2020. In other words, look for continued dominance. Full-fledged defense supplier It's quite remarkable to think that a mid-cap aircraft maker could operate in yet a third major division, but Embraer's military unit is servicing the defense needs of over 60 countries. The A-29 Super Tucano, co-pro- duced with Sierra Nevada, is in the running for the USAF's new prop flight trainer and is used by third-world countries around the world as a primary attack aircraft; the KC-390 is a troop transport and aerial refueling air- frame (planned introduction in 2018) that will replace the C-130 in air forces around the world. While we purchased ERJ inside the Intrepid, we are considering moving it to the more- permanent Penn Global Leaders Club soon. Lowered guidance for 2017 pounded the stock back to its 52-week trough; we saw a short-term opportunity It's quite remarkable to think that a mid-cap air- craft maker could operate in yet a third major division, but Embraer's military unit is servicing the defense needs of over 60 countries. The Embraer Legacy 500 executive jet

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