Embraer Focuses on Defense - Analyst Blog - First Trust Multi Cap Value AlphaDEX Fund (NASDAQ:FAB), Embraer (NYSE:ERJ)

The largest Brazilian aircraft manufacturer, Empresa Brasileira de Aeronautica S.A. (ERJ) – Embraer, is in talks with the Colombian government to deliver KC-390 defense aircraft.

In August, Embraer signed an agreement with the Chile's National Aeronautical Enterprise (Empresa Nacional de Aeronautica - ENAER) to deliver KC-390 military transport jet. In July, the Brazilian Air Force (FAB) also announced its intention to buy 28 KC-390s.

The KC-390 with a cargo capacity of 23.6 tons is expected to operate as early as 2015. Defense segment forms a significant part of Embraer’s revenues as during the second quarter of fiscal 2010, alone the segment contributed 13.0% of total revenue.

The defense aircraft contract as well as the changes in the U.S. Defense budget would influence the segment. Three proposed contracts in two months and an increase in the U.S. defense budget for the fiscal 2010 and fiscal 2011 would definitely encourage results in the coming quarters.

During fiscal 2010, the government has proposed a 4% year over year increase in the U.S. defense budget and in fiscal 2011, they have anticipated a 2.8% increase in the budget from 2010 level.

Embraer is experiencing strong orders for Embraer 170/195 jet and the Legacy. The company is planning to deliver the mid-sized Embraer MSJ or Legacy 450 and the mid-light Embraer MLJ or the Legacy 500 by the second half of fiscal 2012 and 2013, respectively.

However, the company’s high dependence on some models, with a primary focus on American airline companies, exposes it to considerable risks. Thus, the stock currently retains its short-term “Hold” rating with the Zacks #3 Rank.

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Embraer Focuses on Defense - Analyst Blog

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