Downgrading Embraer To Underperform - Credit Suisse Comments

11/2/2009 12:54 PM ET

(RTTNews) - Monday, Credit Suisse downgraded Embraer-Empresa Brasileira De Aeronautica SA (ERJ: News ) shares to Underperform from Neutral with a price target of $22.

Analyst Otavio Campos noted that Embraer reported very disappointing third quarter from top to bottom. The strong deterioration in operating margins should be the catalyst awaited by investors to sell the shares, since the grim outlook was already raising concerns about this story.

The analyst said that although Embraer is expected to achieve its delivery guidance for the commercial segment in 2009, the disappointing third quarter result reinforces the concerns on its execution capacity in the near term since uncertainties related to 2010 deliveries coupled with continued BRL appreciation points to a very weak 2010, backlog will likely remain on a downward trend for the upcoming quarters due to lack of orders, and cancellations, deferrals and expiration of options not converted into firm orders should accelerate the backlog deterioration and be negative triggers.

The analyst added that Embraer's net revenues guidance for 2010 of US$5 billion, coupled with low operating margins, confirms the grim scenario due to limited financing; a still weak economy in developed markets, where 50% of ERJ's backlog is concentrated; and the fact that large carriers such as Jet blue and US Airways are planning to reduce or at least not expand their ERJ fleet in 2010.

The analyst said that following disappointing third quarter results, which came in worse than his weak estimate, and after the stock's rally of more than 20% since the strong second quarter result, he believes the neutral rating no longer applies and are thus downgrading the stock to Underperform.

Currently, ERJ is down $0.45 or 2.22% and trading at $19.80.