Honeywell International Inc. (HON), The Boeing Company (BA), Embraer SA (ADR) (ERJ): Defense and Commercial Flights Are on a Roll

Embraer: E-jets are key for growth

Embraer SA (ADR) (NYSE:ERJ) is a Brazilian company that produces commercial, military, small jets, and provides aeronautical services. The company has not been performing as well as its larger peers: it posted a 5.7% decrease in revenue for the first quarter of 2013 compared to the same quarter of 2012, its EBITDA margin plunged from 12.8% to 9.2%, and so did its net cash which declined from $301 million to $98.2 million in the same period. This heavily impacted its EPS which decreased from $0.58 to $0.16 for the same quarter, showing that the company is having issues with its operating expenses and is suffering from fewer delivery orders.

One of the reasons behind the increase in operating expenses is that Embraer SA (ADR) (NYSE:ERJ) had to renew its settlement with the labor union which it finalized in February 2013, and that impacted the balance sheet as a non-recurring payroll expense.

However, the company’s stock has jumped more than 46% since June 2012. The success of the company seems to be in its e-jets (60 to 120 seat segment), in which the Brazilian company has 42% of market share in net orders and 61% in e-jet deliveries. These good growth prospects have been boosted by the increase in demand of cheap airlines such as Ryanair, Vueling, or Easyjet.

Bottom line

The aerospace industry is a very competitive market globally, but it has not been hit severely as other sectors by the global crisis. Although sales have been slow to recover, some companies have reduced operating expenses and this has helped them weather the crisis, such as Boeing and Honeywell International Inc. (NYSE:HON). But, Embraer SA (ADR) (NYSE:ERJ) is having problems in this aspect.

Every company has its risks: if investors are seeking a safer bet, they should go with The Boeing Company (NYSE:BA), if they wish to gain exposure to the aerospace industry but at the same time diversify some of the risks, Honeywell is the answer. Finally, long-term investors should go with Embraer SA (ADR) (NYSE:ERJ) as it is a leading company in the small aircrafts segment that has been growing at a good pace in the last couple of years.

The article Defense and Commercial Flights Are on a Roll originally appeared on Fool.com and is written by Vanina Egea.

Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends Embraer-Empresa Brasileira. Vanina is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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