Embraer Stock: Still A Buy Despite Downgrade And Miss (NYSE:ERJ)

In September 2022, I put a buy rating on Embraer (NYSE:ERJ) stock and that rating has worked out quite well so far as the stock has appreciated 72% compared to a 25% gain for the broader markets. Since my last report, in which I marked ERJ stock a strong buy, the has gained around 13% which is in line with the broader market performance. In this report, I will be revisiting Embraer stock, and the main reason for that is that Embraer posted 2023 delivery numbers that missed guidance and expectations.

Embraer Airplane Deliveries Fall Short Of Guidance

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For 2023, Embraer had guided to deliver 65 to 70 commercial airplanes and 120 to 130 executive aviation deliveries, for a total of 185 to 200 deliveries. The Brazilian jet maker ended up delivering 64 commercial airplanes, short one to six units on the guidance, and 115 executive jets, which were short five to 15 units compared to the guidance.

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I previously already pointed out that Q3 2023 Executive Aviation deliveries showed a sequential decrease in deliveries, while the same quarter last year showed a sequential increase. In hindsight, that can be seen as the earliest indication that Embraer was at risk of missing its guidance for airplane deliveries. It was already clear that the delivery profile for many aerospace companies would be heavily backloaded, but the second half of the year came in weaker than expected for airplane production, pointing to supply chains recovering slower than expected. Hexcel Corporation (HXL) also pointed out the weak single-aisle airplane output in the second half of the year and I would say that overall airplane production and delivery rates were softer than expected and Embraer’s delivery numbers reflect this.

What Are Analysts Expecting For Embraer Q4 2023 Earnings?

For the fourth quarter of 2023, analysts are expecting Embraer revenues to come in at $2.01 billion, providing stable year-over-year revenues. Over the past six months, the revenue estimate has already come down by 7.4% which provides some indication that analysts were already positioning for an eventual weaker-than-guided delivery profile for the fourth quarter. Earnings per share are expected to come in at $0.71 indicating a 472% growth year-on-year, but estimated earnings per share have come down by roughly a third over the past six months. Important to keep in mind is that the earnings per share estimates are based on estimates from only three analysts.

Embraer will report fourth quarter and full year 2023 earnings on the 15th of March before the opening bell. So, that is also when we will know what the missed guidance means for the financials, and more importantly, we should be getting some insight on whether the missed revenues will bolster 2024 deliveries or not and how the jet maker views the supply chain health going forward.

Is Embraer Stock Still A Buy?

For analysts of HSBC, the delivery numbers of 2023 missing the guidance was reason enough to downgrade Embraer stock from Buy to Hold and lower the expected deliveries for 2024 from 215 to 197. I think that shows quite well how important management’s comments on 2024 deliveries and supply chain health will be. I have implemented the most recent analyst expectations, and while free cash flow projections have slipped, I believe that the stock is still a strong buy with a $26.25 price target representing 44% upside. Wall Street analysts have a $22.73 average price target for Embraer stock, representing 25% upside.

Conclusion: Embraer Stock Is Still A Buy But Management’s Comments Matter

I believe that Embraer stock remains a buy despite the company missing its delivery guidance for both commercial aviation deliveries as well as executive aviation deliveries. Nevertheless, I continue to believe the stock is a strong buy. For positive share price development, however, we do need to see some solid comments from Embraer on supply chain health at present and how the supply chain health is expected to develop in 2024. Expectations that the supply chain issues are going to evaporate in the next 12 months are in my view not realistic, but management’s comments on how they plan on not missing the delivery guidance for 2024 is going to be important to the company’s stock price.

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