Why Embraer's Planes Fill The Airline's Bill

Traditionally, when investors saw the demand for commercial aircraft about to take off, they plowed money into Boeing (BA ). But old habits are changing in favor of a competitor from Brazil: Embraer (ERJ ) -- Empresa Brasileira de Aeronáutica (ERJ). David Williams, a portfolio manager at U.S. Trust (SCH ), is high on the stock because regional air travel is growing around the world.

Embraer is ahead of competitors Boeing and Bombardier in offering fuel-efficient, midsize jets (70 to 110 seats), he notes. The planes are popular with low-cost U.S. carriers, including JetBlue Airways (JBLU ) and in Europe, with Finnair and Alitalia. Embraer sells some 95% of its aircraft in U.S. dollars, so the stock doesn't have the currency risks that normally come with Brazilian investments.

Total debt-to-capital is a reassuring 38%. Free cash flow will grow at a compounded annual rate of 24% through 2008, forecasts Merrill Lynch (MER ). Williams says the stock is worth at least 36. Merrill's target is 38 by December. The shares are trading at 28 today, just 11 times 2005 earnings estimated by analysts at $2.68 a share, according to Thomson First Call. That's a bargain at just half Boeing's p-e of 21, says Williams.

Gene Marcial is away for several weeks.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By David Henry

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