Embraer Seals $3.3B Brazilian Defense Deal - Analyst Blog

Brazilian aerospace major Embraer S.A. ERJ has secured a $7.2 billion reais ($3.26 billion) contract from Brazil's Air Force to provide KC-390 aircraft. The deal evoked a slightly positive market reaction with the shares gaining 0.6% on May 20.

Per the contract, the world's biggest maker of regional jets will provide 28 KC-390 military cargo jets over a span of 10 years. The first delivery is slated for late 2016. However, the contract is yet to receive final approval from Brazilian military authorities that is expected within 90 days.

KC-390 is a medium-size, twin-engine transport aircraft that competes with Lockheed Martin Corp.'s LMT C-130 Hercules series. The KC-390 aircraft is designed to set new standards with its ability to execute various missions ranging from cargo and troop transport, cargo deployment, aerial refueling, search and rescue to combating forest fires. This aircraft also has lower operating cost in its category, making it a strategic fit for the country's defense needs.

The company notified that 728 such planes will be required globally over the next two decades. Of this, Embraer expects to meet 15% to 20% of this estimated demand with its new KC-390. Apart from the latest Brazilian Air Force deal, Embraer has plans to sell 32 KC-390s to countries like Chile, Argentina, Portugal and Colombia.

Embraer recently posted better-than-expected first quarter 2014 results buoyed by strong defense and executive jet deliveries. The company's firm order backlog totaled $19.2 billion, reflecting a quarter-over-quarter increase of 5.5% and year-over-year rise of 44.4%. Its Defense & Security business accounted for 31.8% of total first quarter sales and increased 56.7% from the year-ago period.

Besides its Defense operations, its commercial business holds immense value. This Brazilian jet maker is the world's third largest commercial aircraft manufacturer on the heels of The Boeing Co. BA and Europe's Airbus. In the first quarter 2014, the company's firm order backlog reached its highest level since the second quarter of 2009, mainly due to orders in the Commercial Aviation segment.

We expect Embraer's Defense as well as Commercial divisions to generate a steady stream of revenues in the future.

Embraer carries a Zacks Rank #2 (Buy). Huntington Ingalls Industries, Inc. HII also carries the same Zacks rank as Embraer.

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