Very often, we focus on the fundamentals of the companies to call out the price directions. For now, put aside these asides.
Embraer (NYSE:ERJ) is a Brazilian company which is 'dollar' dependent in many ways. So where goes the dollar, so should Embraer. The dollar factors and near/long-term impacts are:
- Their goods (airplanes) are price in dollar worldwide. They do have $20B+ in backlog and their revenue this year is approx $6b. So looking out 3+ years, as the dollar get stronger, the more valuable is their revenue stream.
- They buy a lot of the components in dollars. Their dollar expenses are approximately 60%, and the other 40% is in local Brazilian real. As the dollar get stronger over the real, local real expenses are 'cheaper' in dollar term. When they do report their ADR earnings in dollars, their margins willl expand by 3 - 5%.
- They decrease staff (-250 headcount cut) in local production facilities, and the local real cost will go down aggressively.
The more the dollar goes up, ERJ expenses go down, and worldwide revenue becomes more valuable!
Disclosure: Author holds a long position in ERJ