short-termism is strong in this thread.
i really dont care. im down a lot more than 2% on some of my other holdings 
What’s your average in on this one?
23.00, will add if it drops 5-10% over the next few months and nothing material happens.
Yeah, hopefully you won’t have a chance to add, haha.
It’s a bummer, because from when I started the thread, ERJ is up 12% and about 3% above the S&P despite the recent slip. But you and Stallion are January buy ins which makes for a harder comp. Long term (a few quarters or years) this will be a very strong trade though. Nothing fundamentally has changed and as production approaches (already late stage), your development risk steadily declines.
Yea im not too concerned the story is still intact and I tend to have longer holding periods anyway
What’s the biggest risk here BS? Delayed production? Lower than expected demand? FX?
Is the Brazilian government’s defense spending cuts not going to continue to suppress growth?
The biggest risk would be a major collapse to commercial aerospace which is late in the cycle. This is where it gets a little nuanced though. ERJ and Bombardier build these <160 seat regional aircraft while BA and Airbus build above that. The >160 seat space is very late in the cycle and most demand has been filled with orders that are now sitting in backlog. However, back of the envelop, I’d estimate only about 1/3 of the regional order books have been filled, making the <160 seat still early in the cycle. The way this works is, with the growth that’s been expected, most of the emerging market airlines (primarily Asia) have built out their primary routes between major hubs and are now filling in the cracks off of those hubs (regional jet market).
The biggest threat would be a widespread collapse in Asian and emerging market airlines so complete they can’t spend the CAPEX to fill in those cracks or in which they go under all together. It’s not a completely benign risk. That being said, ERJ caters more ot the developed market and blue chip airlines (think Americas and Europe) with a premium product, so barring a DEEP cycle in the >160 seat space, I don’t think their order books will be overly impacted, especially with the recent protectionism that will help keep EM airlines from pushing excess capacity into developed markets at subsidized rates.
Development risk is more or less in the rearview mirror at this stage. Delayed production seems like a miniscule risk as well for several reasons. First, this was not a clean sheet design, with the E2 (their new generation of <160 seat jets which comes on in three models with entry to service in 2018, 2019 and I believe 2021 for the smallest model). So they’ve already been producing a similar variant successfully in the past off the same assembly lines. In addition, it uses the GTF engines which are made by the same supplier as the C series by Bombardier. There were issues ramping this engine into full rate production that caused the C Series to be delayed in 2017, but expectation is for the C Series and GTF supplier to supply at full rate in 2018. What this means, is the C Series created a nice trial run for P&W to work out the kinks in engine development. So I don’t expect any major setbacks in either aircraft or engine production for the E2.
FX is a pretty small risk as well as they’ve moved a lot of production to the US and Europe and transact primarily in USD with most debt USD denominated.
Defense as a whole is roughly ~15% of revenue (this is off the top of my head, so could be a little off), only a portion of which is to Brazil. While they initially had to slow the development of the KC390 around 2016, Brazil seems to be on the up and payments are now up to date on KC390 development with deliveries about to take place and that development completed as well. In other words, I don’t see the defense segment to be a major factor either way.
Most of the price risk you see in this name simply comes from the fact that it’s a Brazilian domiciled firm which comes with a high headline beta. If this firm were US based with it’s current backlog and dominant market position, I’d bet my left nut it’d trade in line with the low beta aerospace and defense market.
As a positive risk, there are signs of a very gradual tailwind finally forming in the business jet segment and after taking market share there steadily for the past few years in a down market, I would expect ERJ to see serious benefits if that segment saw any significant strength.
Let me know if that covers your questions. In case you’re wondering, I’m up at 2am because my wife is out of town and I just finished binge watching Stranger Things. Holy crap, great show, gotta get some sleep now.
Very interesting, thanks for the detailed response. Given the late stage cycle of the >160 seat producers, are you concerned that they may expand to the <160 seat market? I can’t imagine there’s too big of a barrier to entry. I understand there’s significant lead times and long production cycles, but I’d bet the big guys (BA) could ramp up production quickly if there was market share up for grabs (maybe I’m wrong).
I’m considering breaking my #1 rule of investing: never invest in something based solely on a recommendation (especially if you don’t fully understand the business)
You make a compelling case though.
Nah, there’s significant CAPEX and lead time involved. By the time they launched a jet, order books will be filled and they’d be hitting the end of the cycle. Plus, ERJ has embedded home field advantage, a tough jet to beat design wise and is literally the only one of the four producers (bombardier, BA and Airbus) that reliably develops and builds jets on budget and within schedule (look at each of their development histories). BA and Airbus will stick to what they know, plus their hands are full tackling their current backlogs and managing that.
On a side note, the second E2 model just had it’s first flight yesterday three months ahead of schedule…
http://www.monitordaily.com/news-posts/embraer-flies-newest-jet-e2-family-ahead-schedule/
Yea, Swan is doing a good job pitching this one. It is tempting me to break my rule as well, but the problem is if Swan disappears I wouldn’t know what to do! I wish I had more free time to learn this industry and look at the company.
yeah im done listening to BS. Those two stock picks are my two worst performers on the year!
What was the other one besides ERJ you grabbed? Anyhow, your call. I’ll tally things up when we hit the end of the holding periods.
I mean, it’s hard for me to feel bad on this one. I rec’d ERJ in October, you buy it at the recent January peak following the Trump run-up then throw in the towel on purely beta driven price action with no change in fundamentals whatsoever after less than two months on a pitch that was delivered as a five year holding period.
Although I’m 90% sure you either A) didn’t buy this and are messing with me or B) did buy this just to mess with me and either way, you’re getting your money’s worth.
i bought it son and also UAN which is a total turd. I have made a fortune from the bank stocks since the Drumpf runup(WFC, GS, a couple others) These are total turds though.
Nice job on the financials. Well definitely do what you think is best, my point of view is documented.
SUNE bros
I was looking at ERJ back in Sept/Oct too and decided to stay on the sidelines for now. Isn’t the commercial aircraft market too saturated already? Where do you see the demand coming from? What are the catalyst? A clear one is worsening the situation at/bankruptcy of the biggest competitor. However, as we all witnessed the Canadian government won’t let Bombardier go that easy. The bet is on the emerging markets but here’s how I see the situation:
- Price war among airliners will persist until the dominant low-cost (Ryanair/Spirit) push the under-performers (Flybe and the likes) out of the game. In turn, their capacity will be sold to third world countries
- Booming economies (China/India/Russia) are starting producing their own planes;
- Industry trends shows 180-200 capacity is more efficient to carriers;
- Different climate zones require different machines (here, the ERJ might now be suitable for Indonesia or Russia);
- Politics comes into play here; Brazil is instable right now
You are talking about a 5 year holding period. Boeing is working on ways to revolutionize the way we fly. Does ERJ has the resource to compete with the big guys in the long term? Do you think we will see some innovations in the industry over the next 5-10 years or are we going to stay still at the point where we were 60 years ago?
I addressed all of these in this thread already.
ERJ has 55%-80% of each addressed market segment by seating. All of the order books you’re referring to are in the >180 seat space.
They already dominate their market segments. Demand is coming primarily from aging existing blue chip fleets that need replaced. That and the fact that they produce the best aircraft in their segment at the best cost point with a 20% fuel savings on the new E2. They don’t need new demand some exogenous, they already have a 6.4 year backlog and dominant industry position. You’re talking about the industry leader as if they’re the upstart?
Bombardier already lost the regional jet segment to ERJ. 10 years ago, they had 70% of the market to ERJ’s 30%, now that has reversed while they were busy blowing up their balance sheet with the C Series, picking a fight with Boeing and leaving their CRJ line go without new investment.
ERJ isn’t relying on emerging markets for demand, they’re the high end producer and simply replacing aging fleets within the blue chip space where they already dominate. Beyond that, their aircraft have competed against and beaten all EM peers because on reliability, cost and efficiency. At the end of the day, the cost is in the development and they’re the only major producer to do this on schedule and within budget. No blue chip is going to fly a COMAC for obvious reasons.
180-200 seat is only more efficient for routes that can be serviced by 180-200. You still need regional jets to fill out the hub and spoke model, this is just dumb reasoning. By your logic, all routes should be filled with 787’s… dum dum dum dum dum
Actually ERJ will outperform in all climate zones for the same reason BA and Airbus do. The idea that you need a different jet for a different commercial climate is silly. You fly the same A350 out of Miami as you will out of Norway.
As pointed out, everything is USD denominated and most manufacturing is in North America and Europe. Brazil has nothing to do with their production and revenue beyond driving equity beta on the headline level.
Again, this is pretty weak. We have full visibility into Boeing models over the next decade as they’ve just completed their own new product cycle. ERJ doesn’t compete with Boeing, drawing that comparison is like asking if Honda can compete with Lamborghini.
Feel free to re-read the thread.
Right, so I am missing the investment thesis right from its root. The bet is on maintenance/replacement in a highly-leveraged, yet low-margin industry in the developed countries rather than new capacity. That’s good to know. Moreover, we are timing the position with the interest rates pickup.
I am not questioning Emraer’s dominance in this particular market segment. Instead, I am concerned about the future of the segment itself.
Apparently, 180-200 seat might only be more efficient for routes worth serving by plane at first place. I believe distances in the range of 300-400 miles should be taken by trains (especially in highly-populated regions as the developed markets); everything beyond 1000 should be 787’s. Tight gap, isn’t it?
Might be the case. I spoke to a pilot when researched ERJ and he pointed out that the planes might not be suitable for some of the markets I am looking at. He also said new competitors are emerging in this market segment. Having said that, companies that are currently using Embraers are unlikely to switch due to training/adoption costs. Also, ERJ’s price points are quite attractive.
Anyways, I will look at ERJ once again and might add on the dip. Have you run the figures? What’s the target price? Do we have particular catalysts to look for or we rely on the book to play out and steady growth from replacement? What’s your view on the other product lines? You pointed out defense is doing well compared to competitors; how about the executive jets? Bullish there?
Ok, I cover this sector and my brother flew these things as a pilot for almost a decade. Your opinion on trains just doesn’t bare out in reality. The US and Latin America are not going to suddenly going to decide to replace regional jet travel with airplanes overnight and Europe has been growing out regional travel despite a proliferation of train routes. In addition, seat sizing isn’t just about distance. It’s also about hub economics. Not ever route will fill out 787’s regularly and if you don’t have a full network you won’t have a strong customer base, competitive position or flexibility. Your point about 787’s is all the more silly when you realize strong airlines like Southwest solely uses smaller 737’s and JetBlue exists almost entirely on A320’s while some carriers dominate on 787 based routes. Not to mention ERJ ALREADY HAS 6.4 YEARS OF BACKLOG.
The US airlines (which I also cover) are healthy and not highly leveraged (most just got lifted to investment grade ratings BTW) and these regional routes are among the most profitable. Might want to revisit your “thesis” which sounds like it was pulled straight off seeking alpha and talk to a better pilot. Also if you didn’t notice, blue chip US airlines are riding on record profitability on structurally cheaper fuel (60% of lifetime operating costs), seeing almost $1B a year in additional cash flow. You’re talking about firms like American Airlines that have seen EBITDA levels rise from roughly $1.5B in 2012 to $9B in 2015 and $8B last year and now oil is showing fresh weakness, but lets get distracted by rising rates. In contrast Asian airlines have seen the weakest profitability over the past three years and some bankruptcies with a few circling the drain as hubris has driven order books past demand as growth has slowed in the region. No offense, a month ago you were asking for tips trying to model cyclical company’s revenue with a random monte carlo sim because you admitted you couldn’t do that or time the cycle and now you’re prognosticating on the airline industry. I don’t have a set target price, but will be glad to hold for the remainder of the four year period. Very bullish on the executive jets as well. Deep trough, still taking market share.