Eve's eVTOL Development Will Drive Future Diversification Opportunities

Key Takeaways

• Embraer's efforts in supply chain management and strong Executive Aviation performance indicate potential for improved efficiency, revenue growth, and better margins.
  
• Defense & Security segment growth and Eve's eVTOL development highlight long-term revenue potential and diversification opportunities.
  
• Supply chain challenges and competition are straining Embraer's Commercial Aviation segment, necessitating reliance on Service & Support and Defense to stabilize margins.

Catalysts

Designs, develops, manufactures, and sells aircraft and systems in North America, Latin America, the Asia Pacific, Brazil, Europe, and internationally.

• Embraer's focus on enhancing supply chain management, including reinforcing team capabilities and implementing digital tools, aims to resolve ongoing challenges and improve efficiency, potentially boosting future revenue and earnings by stabilizing production rates.
  
• The strong performance in the Executive Aviation segment, with a 65% year-over-year increase in Q3 revenue and improved margins, indicates sustained demand and better pricing, which could increase future revenues and enhance net margins.
  
• The increase in Embraer's firm order backlog to $22.7 billion, along with a book-to-bill ratio higher than 2:1, suggests robust demand that supports revenue growth projections.
  
• The Defense & Security segment's backlog and revenue growth, supported by new orders for C-390 Millennium and A-29 Super Tucanos, demonstrate potential for long-term revenue and earnings expansion with new contracts from countries like the Netherlands and Austria.
  
• Continued development and financial support for Eve's eVTOL project, including a $236 million secured loan, sets the stage for future market expansion and potential revenue diversification once operational, especially with certification expected by 2027.

Embraer Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Embraer's revenue will grow by 16.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.3% today to 6.0% in 3 years time.
• Analysts expect earnings to reach R$3.0 billion (and earnings per share of R$4.29) by about December 2027, up from R$2.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2027 earnings, up from 16.1x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 35.2x.
• Analysts expect the number of shares outstanding to decline by 2.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.9%, as per the Simply Wall St company report.

Embraer Future Earnings Per Share Growth

Risks

• Embraer is facing significant supply chain challenges, particularly with engines and structural components, which have led to a reduction in their Commercial Aviation delivery guidance. This could constrain revenue growth in this segment.
  
• The adjusted EBIT margin for Commercial Aviation has declined due to supply chain delays and unfavorable product and customer mix, resulting in negative margins. This indicates financial strain and could impact overall earnings negatively.
  
• Despite a positive outlook for Executive Aviation, the market is expected to normalize, which may come with stronger competition and pressure on pricing, potentially affecting future revenue growth and net margins in this division.
  
• The Commercial Aviation segment is facing strong competition and mixed margin performance, leading to a lower-single digit margin for the year, which may impact net earnings if not improved in forthcoming quarters.
  
• Due to ongoing operational challenges, the company must rely heavily on its Service & Support and Defense segments to offset its Commercial Aviation shortfalls, indicating execution risk in maintaining stable margins and cash flow across business units.

Valuation

• The analysts have a consensus price target of R$61.25 for Embraer based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$81.8, and the most bearish reporting a price target of just R$45.21.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$49.4 billion, earnings will come to R$3.0 billion, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 17.9%.
• Given the current share price of R$56.94, the analyst's price target of R$61.25 is 7.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.