Embraer (EMBR3) reports margins and cash flow above analysts’ expectations; stocks are up

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Embraer (EMBR3) reported its results for the second quarter this Thursday morning (4) with revenue below estimates, but margins and cash flow above consensus.

The jet maker delivered earnings before interest and taxes (Ebit) of $81 million in 2Q22, beating Morgan Stanley’s estimate of $47 million and consensus of $32 million, while also generating cash significant cash flow (despite delivery levels), leading to a positive reaction from equities in today’s trading session. At 10:33 am (Brasília time), EMBR3 assets rose 4.13% to R$13.11.

“Bookings were strong again in the quarter, with the company citing a book-to-bill rate of over 2.5x in business aviation,” Goldman Sachs wrote in a report.

The Ebit margin (Ebit over revenue) of 8% in a scenario of low level of deliveries highlights “Embraer’s efficiency advances in recent years and a shift in focus from managing volumes to profitability”, comment Morgan analysts. “Additionally, the 2Q22 results put the jet maker on track to deliver 2022 Ebit margins at the top end of its 2022 guidance range.”

Adjusted free cash flow of $91 million also came in well above Goldman Sachs estimates and market consensus.

As with last quarter, the company has not made any changes to its full-year guidance (projection) for 2022, and analysts at Morgan Stanley continue to view its $50 million cash flow estimate as conservative (even excluding the effect of asset sales), at least assuming a supply chain improvement and reduced inventory levels in 2H22.

Morgan Stanley maintains an overweight valuation (equivalent to a purchase) for Embraer ADRs, with a target price of US$ 14, compared to the previous day’s closing price of US$ 9.55, which represents a potential appreciation of 46.6%. Goldman Sachs also has a buy recommendation, with a price target of $19, a 99% upside potential.

Conference Call Highlights

In a conference call with analysts, Antonio Carlos Garcia, CFO of Embraer, pointed out that the second quarter was a period driven by a combination of positive factors, with a very high share of services in revenue, as well as a favorable commercial area mix, due to old contracts.

“In the second half, that changes. We don’t think we will see margins drop much, but we will have a different revenue mix, with a little more defense and commercial aviation”, explains Carlos. “In general, we have an improvement. The company is learning to earn more with less.”

According to Francisco Gomes Neto, the company’s CEO, the company has been noticing an increase in sales, especially in executive aviation and the defense sector – after the recent signing of a contract with the Netherlands.

Among the obstacles, Embraer highlights that the lack of pilots in the United States has been delaying the recovery.

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