Embraer SA (NYSE:ERJ) is an aircraft company based in Brazil. They reported results for the fourth quarter, which weren’t anything short of disappointing with their projections for 2015 also weak. The stock price fell to a new low value over the 52 weeks range; $30.63. However, eventually, Embraer SA (NYSE:ERJ) will recover to $33. But the pressure on earnings is due to something else entirely, there are only temporary factors that are putting the pressure on earnings of Embraer SA (NYSE:ERJ).
One of these factors includes the change in design of their E-Jets, the main commercial jets of the company. By 2018, the position of Embraer SA (NYSE:ERJ) will likely improve because the company would start making deliveries of their commercial jets. The earnings before EBIT that Embraer SA (NYSE:ERJ) reported in their Q4 earnings report equaled $196.3 million. This number was much below the expectations of the analysts.
In the year 2013, the earnings before EBIT of Embraer SA (NYSE:ERJ) totaled $315.9 million. Meanwhile, the management team thinks that there are two factors in particular that have led to this decline in the share prices. First of all, Embraer SA (NYSE:ERJ) had seen very unfavorable mix shifts in the two segments, executive aviation and the commercial aviation. The reason being that the customers shifted to, and favored, less profitable and smaller models.
The second factor is the pricing pressure that Embraer SA (NYSE:ERJ) was pushed under in the commercial aviation segment. Bombardier is giving Embraer SA (NYSE:ERJ) fierce competition. In a few years, the E2 jets will be introduced but this plan is also aggravating the pricing pressure. In order to convince the customers to buy the current models instead of waiting for the new models, Embraer SA (NYSE:ERJ) must offer discounts.
According to Embraer SA (NYSE:ERJ)’s analysis and projections, they will face the same challenges in 2015 that they did in the fiscal 2014. The commercial aviation segment will be dominated by the smaller jet model E 175 and consequently, the margins will drop. The EBIT margin in 2014 was 8.6%. In 2014, the margin will fall in the range of 8% – 8.5%. This lower margin may be negated by a slow revenue growth in the next year.
Last year, Embraer SA (NYSE:ERJ)’s EBIT was $543 million and the projection for 2015 is $490 – $563 million. These projections and forecasts may actually be more conservative than they look. Over the past year, Brazilian currency has significantly declined in comparison to the American currency and recently, this decline in value has further accelerated. On Monday, the value of the Brazilian real hit the lowest value in a decade.
This is an important factor for Embraer SA (NYSE:ERJ) as about 25% of the company’s costs is dominated by the Brazilian real part of the revenue and 90% is dominated by the dollar. So the profitability of Embraer SA (NYSE:ERJ) increases as the value of the real falls.
