(By Mani) The shrinking backlog of Embraer SA
) particularly in the commercial jet portion of the company's business remains a key concern for investors as they weigh management commentary about opportunity for 1 time book to bill ratio with the obvious implications of production cuts into 2013 should demand not turn around.
In addition, the shares of the Brazilian aircraft makerhas had its ups and downs this year primarily on the back of concerns about the American Airlines bankruptcy impact on the company where the risk of downside exposure then evolved into opportunity for Embraer to capture an order on the back of the American's likely scope clause relief.
"Once US Airways began openly courting AMR for a merger, the timing and potential of a sizable award to ERJ became less clear," Deutsche Bank analyst Myles Walton said in a client note.
European weakness and a global slowdown further dampened the outlook for Embraer orders of their E-Jet family and the stock.
"While we'd naturally prefer a multi-year backlog visibility, we don't think the situation is as dire as the stock performance recently would make you believe," Walton said.
The stock's valuation and earnings expectations continue to look good, though it's clear that the market's concern about production cuts has to be assuaged by some better order flow by year-end.
The company continues to expect flat production into 2013 versus 2012 (105-110 deliveries is guidance for 2012). Based on current backlog,the company is believed to have virtually sold-out for the remainder of 2012, about 75 percent sold-out for 2013.
"We estimate that slightly just over 40 of the 200 aircraft in the current backlog are for delivery beyond 2015," the analyst said.
Through year-end, the stock would hinge on incremental orders that can be captured to fill in the 2013 skyline of deliveries. A review of the order book would suggest there is order opportunity for the 170/190 family of jets from certain Indonesian/Chinese carriers as well as incremental ordering from leasing companies where backlogs have been burnt off, which could equate to about 40 aircraft by year-end 2012.
However, the US demand still looks like it will dictate the trajectory of the next 18 months with Delta, American, United and SkyWest campaigns to watch. During most of these campaigns, the pricing is likely to be challenging, financing will be important and trade-ins are likely a pre-requisite.
Meanwhile, the E175 is the likely biggest beneficiary of scope clause reduction in the US which limit the number and/or seating capacity of regional jets that can be operated by an airline. It helps saving more American jobs by preventing US Airlines/ Cargo carriers from outsourcing jobs to foreign airlines.
The E175 backlog currently sits at 36 aircraft with high concentration to Flybe (28 of the 36 aircraft). Although the Flybe European low-cost regional business is under pressure, the first 20 E175s have their financing in place, which should minimize the risk through 2014.
"In terms of potential orders for the E175, we'd focus on the US carrier potential as well as incremental leasing company purchases," Walton said.
Embraer is one of the world's main aircraft manufacturers, operates in 92 countries on five continents, and it is one of the leading makers of commercial jets with up to 120 seats.