While Embraer S.A. (ERJ) looks forward to its American and Continental regional jets order, the loss of the Delta Airlines contract in the current quarter has been detrimental to the future revenues of the company. This has led to downward estimate revisions by most analysts covering the company.
Moreover, the highly competitive industry in which the company operates is forcing Embraer to incur high costs with an increase in the prices of fuel along with the possibility of order cancellations. Embraer reported a significant increase in EPADS from a year-ago, but the results also reflected a heavier tax burden, rising wages in Brazil, overt dependence on a few customers and a drop in demand for business jets.
Based on the above factors, we downgrade our recommendation on the stock from Neutral to Underperform. Our $25.00 target price, 9.0x 2013 EPADS, reflects this view.