Willem Schilpzand of Alpine Capital Research presented his in-depth investment thesis on Embraer (NYSE: ERJ) at Best Ideas 2018.
Embraer is the third-largest aircraft OEM in the world, with ~50% market share in regional jets (70-130 seats), ~20% market share in executive jets, and a growing presence in defense and security. Embraer recently reported negative free cash flow and a downward trend in margins due to the high level of investment required for new jet development. The company is also going through a potential trough for executive jet demand and facing cyclical headwinds in the defense business related to Brazilian government budget difficulties. The sell-side appears to have “thrown in the towel”, creating an opportunity for longer-term investors.
Willem believes the negative developments are short-term in nature and overshadow the longer-term opportunity for the company’s jets. Longer term, Embraer should benefit from (i) increasing commercial jet production, as new jets move from the development phase to production and the new jet line-up has the potential to increase the historical addressable market size by more than 60%; (ii) higher executive jet revenue and margins, as demand normalizes from trough levels; and (iii) introduction of a pipeline defense aircraft (KC-390) that could increase the size of the defense business. A combination of increased production at higher margins and lower investment in jet development should lead to an increase in FCF over the medium term. Willem sees value in the mid-$20s per share, for a prospective annualized IRR in the mid-teens.
About the instructor:
Willem Schilpzand is a Portfolio Manager of the firm’s Equity Quality Return (EQR) strategy, the Multi-Strategy Quality Return (MQR) Fund and the International Quality Return (IQR) Fund. He joined ACR in 2010 and has over 10 years of investment experience. Willem’s prior experience includes positions with MFS International in London in 2009, East Coast Asset Management in 2009, Merrill Lynch from 2005 to 2008 and IBM from 2003 to 2004 in both the U.S. and Europe. Willem earned his MBA from the Columbia Business School in New York where he completed the Applied Value Investing Program and earned his BBA, Magna Cum Laude, in International Business from the University of Georgia. Willem has attained the Chartered Financial Analyst® (CFA®) designation and is a dual citizen of the Netherlands and the U.S.
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