Is Embraer the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Embraer (NYS: ERJ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Embraer.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-Year Annual Revenue Growth > 15% | 0.5% | Fail |
1-Year Revenue Growth > 12% | 1% | Fail | |
Margins | Gross Margin > 35% | 20.3% | Fail |
Net Margin > 15% | 8% | Fail | |
Balance Sheet | Debt to Equity < 50% | 67.1% | Fail |
Current Ratio > 1.3 | 1.90 | Pass | |
Opportunities | Return on Equity > 15% | 15.1% | Pass |
Valuation | Normalized P/E < 20 | 17.68 | Pass |
Dividends | Current Yield > 2% | 2.4% | Pass |
5-Year Dividend Growth > 10% | (6.3%) | Fail | |
Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just four points, Embraer isn't flying high right now. But the Brazilian company is poised to benefit from its home country's economic boom and also is making inroads around the world.
For years, two companies dominated the aerospace industry: Boeing (NYS: BA) and Airbus. But the rise of the regional jet vaulted companies like Bombardier and Embraer into the forefront. Now, Embraer has built a significant business, with deliveries on 25 commercial airliners and 23 corporate jets last quarter, and an even more impressive 42 new commercial orders on the books.
Unfortunately, the company hasn't managed to penetrate the U.S. commercial market as much as it could. Southwest (NYS: LUV) runs exclusively Boeing planes, and new orders from AMR's (NYS: AMR) American are split between Boeing and Airbus. That Delta (NYS: DAL) plans to give smaller-plane manufacturers a chance at some of the several hundred planes it plans to order is encouraging -- but far from a sure thing.
Another concern for shareholders is the fact that Embraer lowered its guidance for 2011 earlier this year. With concerns that the Brazilian economy may be growing faster than is sustainable, the defense business that Embraer has gotten from the Brazilian government could dry up. At the same time, though, positive long-term prospects from the Latin American giant should bolster Embraer in the long run.
Embraer may not have reached its cruising altitude, but it has good potential. For a promising emerging-market investment, Embraer could get a lot closer to perfection in the years ahead.
Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Embraer and Southwest Airlines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.
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