This Small Plane Stock Beating Out Boeing and Airbus is a Buy Near 52-Week Highs

The big two aircraft manufacturers - Boeing (BA) and Airbus (EADSY) - continue struggling to get back up to speed with deliveries, thanks to supply chain woes.

Meanwhile, the world’s third-largest plane maker, Embraer(ERJ) - the largest global producer of regional jets - reported an 88% increase in quarter-on-quarter deliveries. In absolute terms, it delivered 47 planes during the second quarter of 2024.

The company began life in the 1960s to serve the Brazilian military, but was privatized in the 1990s. It made its name in the market for smaller planes. Its E175 model is now the dominant player for smaller (70 to 90 seat) regional jets, securing 88% of all North American orders over the past decade.

In 2024, Embraer expects to generate between $6 billion and $6.4 billion in revenues and plans to deliver 72 to 80 commercial aircraft and 125 to 135 business jets.

Consolidated revenue for the second quarter totaled $1.49 billion, a 16% increase year-on-year and 67% over the first quarter. This was driven by solid performance from the Services & Support and Commercial Aviation businesses, which recorded revenue increases of 19% and 17%, respectively.

Embraer’s Turnaround

This step-up in deliveries reflects a broader turnaround for the company. Over the past four years, Embraer’s revenue has grown at a compound annual rate of 26% to $5.6 billion. Forecasts are for Embraer to show a revenue gain this year of 28%.

The company’s turnaround has been remarkable. It has moved from three straight years of operating losses into a period of gradually improving returns. Last year, Embraer made a profit of more than 1 billion Brazilian real (about $180 million). According to FactSet, this year, it is forecast to make more than 2 billion Brazilian real for the first time in more than 20 years!

Embraer’s cash generation has also improved, which has allowed it to cut its net debt. This led S&P Global to upgrade the company’s credit rating back to investment-grade status in February.

The company, which generated $5.3 billion in sales in 2023, has been ramping up production of its commercial jets since the COVID-19 pandemic hit global travel. It ended the second quarter with a $21.1 billion order backlog, its highest in seven years.

The good news continued at the recent Farnborough Air Show in the U.K. in late July. Embraer won orders for nine military jets from the Dutch government and six turboprops from the Paraguayan military. These orders helped to increase its backlog by more than a fifth to that $21.1 billion level. More than half (53%) of the backlog is orders for commercial jets, with 22% for business jets, 11% for defense aircraft, and 15% for services and support deals.

Revenues in 2023 were comprised of: 35% from commercial aviation, 27% from executive aviation, 10% from defense and security, and 28% from services and support. Revenues by geographic region came from North America at 62%, Europe 21%, Brazil 9%, Asia-Pacific 4%, and the remainder was dispersed around the world.

Its CEO, Francisco Gomes Neto, confidentially set a target for the company to reach $10 billion of revenue by 2030 “or even earlier.” It will likely easily reach that target.

There really isn’t any competition for the aforementioned E175 aircraft. The sub-150 seat market is more competitive, but Embraer is still the largest player, and benefited from a 2020 retreat by Canada’s Bombardier(BDRBF), which shifted its focus to business jets. 

Embraer has won 33% of sub-150 orders since 2004. This compares with 22% for Bombardier, 19% for Airbus, and 10% for Boeing.

ERJ Stock is a Buy

The company’s stock has also been re-rated. It is up a whopping 74.6% year-to-date, and 115% over the past year.

There’s a lot more blue skies ahead for Embraer. The company recently published a commercial market outlook that estimates the need for 10,000 smaller aircraft worth around $640 billion over the next 20 years, more than half of which will replace retiring planes. I expect Embraer will win a lot of that business.

Bloomberg Intelligence agrees that Embraer will keep dominating the regional aircraft market with its ERJ 175 aircraft, according to a report. Analysts George Ferguson and Melissa Balzano said, “Embraer jets will likely remain the largest fleet of operated regional aircraft, given its ERJ 175 is the only plane in production that can fly under U.S. scope clauses, which could promote new orders.”

U.S. pilot unions have contracts restricting the size of aircraft that can be flown by a non-mainline pilot. A scope clause limits the number of passengers a regional aircraft can carry. Currently, the hard cap is 76 passengers, and there is also a limit on a regional plane's certified maximum takeoff weight, which cannot exceed 86,000 pounds.

This ends up helping Embraer, adding to the bullish case. ERJ stock is a buy anywhere near the current price of $32.18.