Embraer's Outlook Darkens as Plane Orders Seen Under Pressure

Updated on
  • Estimated '16 EBIT margin, business jet deliveries disappoint
  • Falling oil prices may hurt new aircraft demand, Bradesco says

Embraer SA is anticipating a tougher year than analysts expected, sending the Brazilian planemaker to the biggest decline on the benchmark Ibovespa index.

The company’s guidance for 2016 jet deliveries and profit before certain items fell short of analysts’ estimates. Embraer also said it may be hit with “substantial” fines in the U.S. as it moves to resolve a probe involving the Foreign Corrupt Practices Act.

Embraer is pushing sales of regional jets even as prices for used aircraft are weakening and falling fuel costs reduce airlines’ incentives to renew fleets. The company may also be hurt as a major customer, Republic Airways Holdings Inc., seeks to cut costs after filing last week for bankruptcy.

“Guidance frustrated our bearish expectations,” said Victor Mizusaki, a Bradesco SA analyst. “A combination of weak aircraft prices in the pre-owned market and low oil prices could pose risks for new orders.”

Embraer fell 11 percent to 25.96 reais at 2:01 p.m. in Sao Paulo after tumbling as much as 13 percent for the biggest intraday decline in almost a year.

‘Below Expectations’

The planemaker’s projection that it will deliver 75 to 85 light business jets and 40 to 50 large business jets “is below expectations,” Bank of Nova Scotia analyst Turan Quettawala said in a note to clients. This year’s earnings before interest and taxes will be 8 percent to 8.5 percent of sales, Embraer said in a statement. That fell short of a forecast of 11 percent by Cowen & Co.

The manufacturer said it’s in discussions with U.S. authorities to resolve an inquiry into possible non-compliance with the FCPA. That “suggests greater risk of fines, which are not in guidance,” Cowen analyst Cai Von Rumohr said in a report.

Embraer said it expected to deliver 105 to 110 commercial jets in 2016, up from 101 last year. Sales are likely to be between $6 billion and $6.4 billion, an increase from $5.9 billion in 2015, the Sao Jose dos Campos, Brazil-based company said.

Bankrupt Customer

Embraer reported fourth-quarter profit that fell short of analysts’ estimates as the company made a $100.9 million provision related to the Republic Airways bankruptcy filing on Feb. 26.

The manufacturer had outstanding orders for 24 jets scheduled for delivery to Republic Airways this year and next. Republic has a fleet of 230 Embraer planes, composed of 50 ERJ 145 jets and 180 E170/175 aircraft.

“Cancellation of those orders would impair 5 percent of Embraer’s current backlog and risk up to 5 percent of our expected consolidated revenues for the company through December 2017,” Moody’s analysts Cristiane Spercel and Marianna Waltz wrote in report dated March 1, citing negative credit risks. “Embraer needs to find other buyers to allocate Republic’s orders over next few months.”

Aircraft Backlog

Fourth-quarter net income attributable to controlling shareholders rose 76 percent to 425.8 million reais ($111.4 million), trailing the 527.5 million-real average estimate for adjusted earnings of seven analysts compiled by Bloomberg. Revenue climbed to 7.99 billion reais, boosted by a weaker Brazilian currency. Embraer’s sales are denominated in dollars.

The planemaker’s backlog of firm orders was $22.5 billion at the end of 2015, up from $20.9 billion a year earlier. The company presented an upgraded version of its E190 jetliner, the E190-E2, on Feb. 25 and expects to invest $325 million in product development this year mainly on the new generation of planes.