 Good day fellow investors! Welcome to the Sunday stock analysis video and today we're going to discuss Embraer. It is a Brazilian plane manufacturer that might be the next Boeing. As we can see here, Boeing did pretty well over the last few years because it increased revenue, improved margins, did some buybacks and that led to a much higher valuation and a much higher stock price. There is a possibility that Embraer is now where Boeing was a few years ago because the same things, investment cycle, we are there probably higher cash flows, higher margins in the coming years. Let me explain what we'll discuss today, secular trend in the industry. Boeing's involvement is more or less certain now. This doesn't affect the long-term risk but offers much upside. Margin's expected to improve. We'll look at the company, what are they doing, their fundamentals compared to Boeing, the target price. I see it could be 240 depending also on the risks we will discuss that are there but the value is also there. So the aircraft industry is in a positive secular trend. The international air transportation associations expect a 3.6% average compound annual growth rate for the next 20 years and that's on a constant policy. If we see protectionism then it will be a little bit lower. If we see policy stimulus and more market regularization, more globalization, the current market might even quadruple in the next 20 years. The biggest growth in the number of passengers will come from China, India, Indonesia which are regional markets and on regional markets you need especially for the new routes you need smaller planes and that's exactly what Embraer does. Smaller planes between 70 and 140 passengers. Boeing and Airbus have bigger planes and that's exactly why Airbus went into a collaboration with Bombardier and now Boeing wants to collaborate with Embraer because they lack offers in that segment which will probably be a very important segment in the future. Developing a new plane costs billions so it's better for Boeing to collaborate with Embraer and make a joint venture. What are the benefits that we expect to see there and what might come? Those are the same benefits that Airbus expects with Bombardier. So complimentary product lines 150 with 100 to 150 seat market segment expected to represent more than 6,000 new aircraft over the next 20 years. Production costs savings by leveraging Boeing supply chain expertise, growing market for Embraer and higher revenues for Boeing. Let's look deeper into Embraer. So Embraer is specialized in the production of small to mid-sized aircraft for commercial military agriculture and executive aviation industries and is the market leader for jets up to 150 seats. 57% of revenue comes from commercial airplanes, 28% from executive jets and 15% from defense and security. So they cover the range from 36 to 150 seats. The company is the market leader up to 150 seats especially in the 70 seats range in North America. The region you can see the backlog by region North America is the leader for Embraer. The backlog is pretty stable with the addition new methodology that includes services is about 19.5 billion which is about three years of production and revenues. However there is one risk as you can see in this table the biggest purchaser is Skywest which is ongoing a huge fleet expansion. So if the company Skywest goes into trouble that might mean significant trouble for Embraer. However the stock market is positive about Skywest, the stock has exploded lately so that might a little bit derisk the thing. However American economy, Skywest potential, Skywest expansion is something to keep in mind. This is Embraer's master plan. As you can see there were huge investments over the last few years from the design of new planes, improved planes. So we should see a change in cash outflows up till 2019, 2018 still 500 millions to be spent. But from 2019 the new series E2 series is expected to be selling and cash flows improving significantly. Just a note on executive aviation, the segment is just 7% of the backlog. So for now it seems a stable segment, nobody has big expectations, just stability here. Defense and security, the company is at the end of the development phase of the new KC390 military transport aircraft and the Super Tucano combat aircraft. So they expect to see growth there as they market that around the world. The backlog is a little bit lower but with the new products they might do better. So we'll see how that goes, I didn't dig into defense and security. Let's look at the fundamentals and what's nice about the company is that revenue has been pretty stable with a little ups and downs over the past 10 years. Similarly the gross margin has been also stable but it's a little bit lower now. So there is improvement in gross margin, operating margin, potential improvement also up to push it up to 10% and the earnings per share have always been there but also very volatile, the fourth yellow line. Number of shares stable, very positive, which is always a good thing. Book value per share, we are around $22 per share and operating cash flows have been volatile and are extremely positive now but the cap spending has also been very, very big. As the cap spending lowers the free cash flows should go down which should increase cash flows, dividends, earnings and make Embraer look much, much better stock. This is something similar that was going on with Boeing. In the last three years the gross margins increased from 14, 15 to almost 20 net income doubled thanks to that. Shares then did buybacks, lowered the number of shares, operating cash flows exploded, increased also what almost double in the last five, six years which allowed Boeing to have a lot of free cash flow, get a new valuation from the market and the stock price to spike hugely. So this is the positive quick to look about Embraer. Let's go into some more details about what can happen, how the company is more positioning itself to exploit what they have been doing and discuss how the collaboration with Boeing might end also as a risk. Something very important always to mention is the debt Embraer due to its investments has a lot of debt but it has also a lot of cash. So the net debt is not that big and around $759 million. Comparing to Boeing price earnings ratios we are there but remember Embraer's earnings are volatile, price to book is much more on Embraer's side, 1.1 against 157, price to sales again Embraer leads to 0.7 to 2.1 for Boeing. The outlook is Embraer was really a growth story, is still a growth story so as the company grows it might become something similar to Boeing in the last few years. This is the theory, the strategy of the company as they have had a lot of headwinds, E2 production ramp up, final development, the budget of Brazil, soft business jet demand, commercial aircrafts below $100 that is also expected to switch as the E2 series is complete as the defense products are completed and go into sales. This should normalize CapEx, this should allow for more services, cost management, collaboration with Boeing that should lead to higher earnings, higher cash flows in the mid term so let's say 2020. And what do I see there, just a back of an Appkin calculation for this video, if they manage to improve margins, if they manage to increase revenue a little bit, let's say they bring it to 7 billion with a 10% net profit range, we are at 700 million in profits, 700 million divided by the number of shares should give earnings just below $4 per share, which is a bargain at the current price of 25, not including what Boeing will bring. The management says meaningful gain in our profitability and cash generation related basically to the complete development of E2, the levels above 100 aircraft for deliveries, so they hope to sell more than 100 aircrafts, the KC390, the Tucano, so a lot of positives in the future and the normalized CapEx. What's the benefit of the E2 jets, more profit per seat because the revenue goes up per seat and the cost per seat goes down thanks to the improvements. And you can see here how the fuel cost is lower, okay, the cost per seat per mile is higher in a smaller airplane, but the fuel cost is also lower. There is always the risk that the Boeing deal doesn't go through even if within the last six months we have had much more confirmation about that, so Embraer would fall below 20, below 15 if the deal doesn't go through there where it was just a few months ago, just in 2017, so that's a risk. So further if they missed something in their sales expectations that's also a risk and American economy is also very, very big risk to watch. Nevertheless, let's say if everything goes well, Embraer should be at 40 with a 10-ish valuation, if they get a Boeing-like valuation, then they should be, the stock price could be at 80. So that's the risk reward with Embraer and you have to see how that fits your portfolio, your probabilities for a recession in America with a slowing down in economy, etc., etc. Something very important in relation to the risks is that aircraft deliveries don't really change even in recessions. So there might be some renegotiations, but usually it's growth, it's a secular growth trend, so that doesn't really change and aircraft deliveries and orders were still positive even in 2009 and 2008. So this is my overview of Embraer. I'm watching the company, I'll be watching the company and comparing it to my other risk reward investments. The risk is there, the upside is also there over the next few years, so compare it to the rest of what you own, see how that fits your dig deeper into the company, if it fits your risk rewards and it's better than the other things you own. I think Embraer might be a better risk reward now than Boeing. Thank you for watching, looking forward to your comments and I'll see you in the next video.