Pursuing Brazilian Growth with Embraer

Sep.17.06 | About: Embraer S.A. (ERJ)

The IMF upped its estimates for 2006 growth in Latin American economies to 4.75 percent from its earlier estimate of 4.3 percent. But whereas the pace of growth is expected to ease in some of the region's key economies in 2007 from this year's expected improvement, 10 interest rate cuts over the last year set the stage for growth to accelerate in Brazil. In pursuit of Brazilian growth companies we found aerospace & defense company Embraer-Empresa Brasileir de Aeronautica (NYSE:ERJ), which has experienced improvement in its pace of earnings growth, enabling it to register recently on the Reuters Select growth stock screen for Accelerating EPS Growth.

We started off with a list of 636 companies that recently appeared on at least one Reuters Select stock screen, and then filtered for only those companies that are domiciled in Brazil. This left us with a list of three names. (Click here to download an Excel spreadsheet comparing the companies that appeared on the Reuters Select stock screens, specifically Brazilian ADRs.)

Given the IMF's anticipation of improving growth, we decided to focus on companies from a growth screen. This left us with only aircraft manufacturer Embraer, which recently won contracts to provide executive jets to U.S.-based Magnum Jet and another 100 jets to China airline HNA Group. Business has, indeed, been solid for the world's largest manufacturer of commercial jets with up to 110 seats, and this has buoyed revenue growth in the trailing 12-month [TTM] period. The rate of top-line growth has accelerated from its five-year pace and has gone from lagging the industry to leading it in the process. Revenue growth in the most recent quarter [MRQ] is faster yet.

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Not surprisingly, the revenue gains have turned into earnings advances. Embraer's earnings per share [EPS] have also been advancing at an accelerating pace.

Learn about Growth Rate Ratios

This improvement in earnings helped establish Embraer on the Accelerating EPS Growth screen, which requires that a company's EPS growth rate quicken over time. While that constraint works well to highlight companies with a history of fast earnings growth, we also want some indication that earnings will likely continue to keep improving. For this, we take into consideration analyst EPS estimates and require that the current consensus is at least where it stood eight weeks ago. At present, the mean EPS estimate is $2.70, the same as its reading two months prior. Further, analysts look for additional gains in 2007, when they expect the company to register EPS of $3.12.

There are two other factors that investors should consider. The first is dividends. Although Embraer has satisfied the requirements of a growth screen, it also has aspects that might appeal to more income-oriented investors. For example, over the last five years, the company's dividends have grown at an average annual rate of more than 35 percent, versus an industry mean of less than 12 percent. The company's payout ratio - that portion of net income that is doled out to shareholders in the form of dividends - stood in excess of 66 percent in the TTM span, far higher than the 28 percent average of the industry.

The second is that shares of Embraer are actually American Depositary Receipts (ADRs). ADRs are baskets of a foreign company's stock. ADRs are beneficial in terms of helping U.S. investors gain exposure to foreign companies and helping foreign companies tap the U.S. financial markets. Still, because they represent ownership in foreign companies, they expose investors to additional economic, political, and currency risks than those associated with wholly domestic investments.

At the time of publication, Erik Dellith did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.

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