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Embraer (ERJ) five year holding period

I like these guys for a five year investment, maybe ladder in evenly over the next year watching for a good entry point after the next rate hike.

Edit:  I’m probably a little early on this one, but I’ll stand by it.

#FreeCVM #FreeTurd #2007-2017

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^Any view on the commercial aviation market? BA looks cheap too but have no industry knowledge.

I don’t like the broader commercial aviation market over a 5 year period. There’s a lot of risk to order books in terms of delays and lost orders due to overcapacity developing in Asia that is pressuring other routes.  Plus BA has an increasingly obsolete defense division that still forms a significant portion of earnings but has negative growth prospects.  ERJ on the other hand has a growing defense segment and is immune to much of the overcapacity because it doesn’t compete with the bigger guys in the less than 130 seat segment and most of those orders haven’t been placed yet as most airlines ordered for the major routes and are now in the process of filling out the smaller regional routes.

#FreeCVM #FreeTurd #2007-2017

^Interesting. Isn’t the 130 and under market more crowded than widebodies and larger narrowbodies? We have the Bombardier, MRJ, Comac ARJ planes coming online over the next few years for the ~100 market, along with 737s/A310s on the higher side.

Why the five year holding period? 

rawraw wrote:

Why the five year holding period? 

Transitioning two next gen platforms over that period.

#FreeCVM #FreeTurd #2007-2017

Palantir wrote:

^Interesting. Isn’t the 130 and under market more crowded than widebodies and larger narrowbodies? We have the Bombardier, MRJ, Comac ARJ planes coming online over the next few years for the ~100 market, along with 737s/A310s on the higher side.

No, because Bombardier C Series is >130 seat the 737’s and A310’s are targeted to >160 seats.

The others are all unproven platforms (E2 is built on the existing dominant market platform) by low quality manufacturers, none of which use next gen fuel efficient engine options like the GTF and weigh more.  Also, the ARJ and MRJ are in the <100 seat range whereas the EJets dominate in 90-130, which is the broadest market.  No western blue chip airline is going to operate the comac.  The E-Jet is the only aircraft in the class with a backlog of it’s scale for a reason.  There’s really only a two way competition between the Bombardier CRJ and EJet which has been lost to the E-JEt.  E-2 (due 2018) is new, CRJ hasn’t been significantly reworked in ages with no current planes with C-Series still struggling.  CRJ used to hold 60% of global market, now that’s EJet measured by deliveries with momentum on it’s side and 83% of aircraft in the North American market (for it’s class).

The larger aircraft market is stuck with high development costs and 6-7 year order books at risk while the smaller E-Series market is still taking orders.

#FreeCVM #FreeTurd #2007-2017

it’s interesting that you posted this.  I was actually thinking about the smaller, regional airlines, the shorter flights, and how the fleet seems to be changing.  Hadn’t really though about it from an investment standpoint, but you might be on to something here. 

I just flew on an Embraer 175 for the first time last week, and it was a really impressive plane for short flights.  A lot of room in economy seats, quiet, comfortable seat materials and just an all around nice option.  I was flying Dulles to Minneapolis and it was a much nicer set-up than the 737 I took on the previous leg of the trip.  Nothing wrong with 737’s, but given the choice, I much prefer the E175.  

Black Swan wrote:

Palantir wrote:

^Interesting. Isn’t the 130 and under market more crowded than widebodies and larger narrowbodies? We have the Bombardier, MRJ, Comac ARJ planes coming online over the next few years for the ~100 market, along with 737s/A310s on the higher side.

No, because Bombardier C Series is >130 seat the 737’s and A310’s are targeted to >160 seats.

The others are all unproven platforms (E2 is built on the existing dominant market platform) by low quality manufacturers, none of which use next gen fuel efficient engine options like the GTF and weigh more.  Also, the ARJ and MRJ are in the <100 seat range whereas the EJets dominate in 90-130, which is the broadest market.  No western blue chip airline is going to operate the comac.  The E-Jet is the only aircraft in the class with a backlog of it’s scale for a reason.  There’s really only a two way competition between the Bombardier CRJ and EJet which has been lost to the E-JEt.  E-2 (due 2018) is new, CRJ hasn’t been significantly reworked in ages with no current planes with C-Series still struggling.  CRJ used to hold 60% of global market, now that’s EJet measured by deliveries with momentum on it’s side and 83% of aircraft in the North American market (for it’s class).

The larger aircraft market is stuck with high development costs and 6-7 year order books at risk while the smaller E-Series market is still taking orders.

Interesting, thanks.

An interesting article from a few years ago. I hadn’t realized that there was this much travel volume in the RJ segment.

http://www.wsj.com/articles/SB10001424127887323478304578330293636960034

Up about 20% from first recommendation, with total development costs still targeting less than $2B and first deliveries in 2018 for E2.

Also on related news, the MRJ first deliveries are now pushed back two more years to 2020 with development costs (which already tripled expectations to $5.5B) expected to rise another 30%.

#FreeCVM #FreeTurd #2007-2017

volatile biz with a **** ton of debt.

I love my cheese. I got to have my cheddar.

Neryblop wrote:

volatile biz with a **** ton of debt.

They have net debt to EBITDA of 1.6x ($1.4B of cash on hand against $3.8B debt) concluding E2 development.  Since when was A level net leverage a “**** ton of debt”.  There’s nothing volatile about a business that is 15% defense and 56% commercial aviation with a 4+ year order backlog.  Just ask you know… Boeing or Airbus.  What passes for analysis these days…

#FreeCVM #FreeTurd #2007-2017

ahh sure with ebitda. but i analyze things with fcf since that is what they ultimately will use to pay debt. and their fcf is **** cuz their cash flow is volatile, also if you sum up their fcf the last 5 years, its -500m. so 1.5b net debt will be a problem. 

net income is all positive, but its all over the place too. revenue is pretty consistent but its only a 2% CAGR for the past 5 years. i get that it has a backlog 4+ yrs, but that’s just revenue. its ability to produce cash and earnings is more imp. 

the main difference between boeing and erj is that BA has consistent growth. BA’s net debt is $1b with fcf of $8b in the current year. 

anyways yea sorry if i was brief on that earlier message. thanks for sharing thoughts though. its nice to see ppl make calls.

I love my cheese. I got to have my cheddar.

Neryblop wrote:

ahh sure with ebitda. but i analyze things with fcf since that is what they ultimately will use to pay debt. and their fcf is **** cuz their cash flow is volatile, also if you sum up their fcf the last 5 years, its -500m. so 1.5b net debt will be a problem. 

net income is all positive, but its all over the place too. revenue is pretty consistent but its only a 2% CAGR for the past 5 years. i get that it has a backlog 4+ yrs, but that’s just revenue. its ability to produce cash and earnings is more imp. 

the main difference between boeing and erj is that BA has consistent growth. BA’s net debt is $1b with fcf of $8b in the current year. 

anyways yea sorry if i was brief on that earlier message. thanks for sharing thoughts though. its nice to see ppl make calls.

Ok, it’s clear you don’t cover this industry.  The FCF is negative because they just completed simultaneous development on E2 and KC390.  That doesn’t mean the business is volatile.  Companies in CAPEX heavy industries go through major reinvestment all of the time, this is one example.  What’s important is that it’s funded (which it is) and is done so without pushing up leverage measured against EBITDA.  Once they’re through development, it turns into an all earnings (and FCF) based period that usually lasts for about 10 years. I’m also not sure where you got those FCF numbers, pulling their 20F or simply checking BB shows positive FCF over the past 5 years. They also dominate the industry in terms of market share and execution.  

BA has only had consistent growth because they have larger scale to stagger development costs and the widebody cycle is in late cycle while regional narrowbodies are just coming into play while ERJ.  In addition, ERJ still has leverage to the business jet market.

Based on what you described you’re basically saying all you’d invest in are blue chip A rated dividend names at any given point in time which is non-sensical.

Anyhow, fortunately this is investing so it’ll be simple.  I’m already right (returns since initial call vs market) but I’ll just keep checking back in to point that fact out over the holding period.   

#FreeCVM #FreeTurd #2007-2017

bet a house on ERJ BS?

What was or currently is the reason why the stock was/is depressed versus your evaluation of the value?  Curious what consensus is getting wrong in your view. 

StallionDis wrote:

bet a house on ERJ BS?

5Y holding period, yes.

#FreeCVM #FreeTurd #2007-2017

rawraw wrote:

What was or currently is the reason why the stock was/is depressed versus your evaluation of the value?  Curious what consensus is getting wrong in your view. 

Brazilian firm while Brazil’s in meltdown,

But only ~12% of revenues are from Brazil, the company’s business is dollar denominated with dollar debt and a lot of people simply don’t understand the specifics of the company’s product line and market dominance.  That and the fact that they’re at the tale end of development phase on the next gen of aircraft which have a strong order book.  First deliveries will occur in 2018 with strong cash flow generation beginning around 2019.

#FreeCVM #FreeTurd #2007-2017

im dumping $100k on this one. Im coming after you BS if it flops

are you eating your own cooking bs?

edit: ERJ sold some bonds this morning also

"You want a quote? Haven’t I written enough already???"

RIP

I took a nibble (in at 23.15), looked over financials and thought it was worth a shot. BS thesis seems sound and I am a big fan of buying stocks on silly dips. Dont think I am on board for the 5yr holding period but we’ll see what happens. 

'A flute with no holes, is not a flute. And a donut with no hole, is a danish'

Yes, eating my own cooking.  Obviously seen a tiny run up with everything else so I can’t rule out a beta related dip, but very confidant on the mid (2Y) to long (5Y) run return on this one.  The longer the better with E2 and KC390 entry into service slated for 2018.

#FreeCVM #FreeTurd #2007-2017

good stuff bs. love reading your analysis…. rooting for yall. 

did stud really put 100k into this??

"You want a quote? Haven’t I written enough already???"

RIP

yea i only invest in high quality cos. well in any case good luck to all.

I love my cheese. I got to have my cheddar.

What’s the lead time to bring these market?

Not sure what you’re asking.

#FreeCVM #FreeTurd #2007-2017

I think we’re talking about designing planes but now i’m not sure

“the FCF is negative because they just completed simultaneous development on E2 and KC39”

Oh yeah, development for an aircraft like that (both of those are aircraft) generally spans between 3 and 5 years.  Basically you invest for 5 years and then you produce for 10 to 20 years.  Both of these should see entry into service in 2018 although the E2 is staggered across three sub models coming into market 2018, 2019 and 2020.

#FreeCVM #FreeTurd #2007-2017

got it, thanks BS.

So cash flow pain for the first 3-5 years, maybe 6-12 production time? When do you see the product stabilizing?  Im recalling Boeing had some issues stabilizing their 787 which took a few years but I think that’s pretty common right?

If that’s right, then if this product is really good they’ll have 3-5 year development period, 6-12 month production lead time then maybe 2 years to stabilize any issues. Do buyers in the backlog provide any capital relief up or is it all on Embraer?

So really it’s not a cash flow stable until the of the product’s mid-cycle? 5/6 to 8 years out from day 1?

Galli wrote:

got it, thanks BS.

So cash flow pain for the first 3-5 years, maybe 6-12 production time? When do you see the product stabilizing?  Im recalling Boeing had some issues stabilizing their 787 which took a few years but I think that’s pretty common right?

If that’s right, then if this product is really good they’ll have 3-5 year development period, 6-12 month production lead time then maybe 2 years to stabilize any issues. Do buyers in the backlog provide any capital relief up or is it all on Embraer?

So really it’s not a cash flow stable until the of the product’s mid-cycle? 5/6 to 8 years out from day 1?

I don’t think you have to go that far.  For starters they’re already past development with deliveries starting next year.  They also didn’t go from a clean sheet design on the E2 which cut down on a lot of costs and will cut down on a lot of production ramp up costs.  It will also reduce any issues.  The E2 and KC390 don’t have all the complexity of the 787 and are entering a market they already dominate through the current generation E Jet.

#FreeCVM #FreeTurd #2007-2017