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Last Wednesday, Embraer (NYSE: ERJ) reported subpar results for the first quarter of 2019. Revenue and adjusted earnings per share both missed analysts' estimates by a wide margin.
Not surprisingly, Embraer shares slumped following the earnings report. While the stock has recovered a bit since then, it continues to sit near a 52-week low at around $18. However, the timing of aircraft deliveries caused the earnings weakness last quarter. Embraer's underlying business trends are far more positive than the company's recent results would seem to suggest.
Another weak quarter
Last quarter, Embraer's revenue plunged 14.3% year over year to $823 million. Analysts had been expecting revenue to surpass $1 billion. That said, the revenue decline shouldn't have come as a shock, given that Embraer reported earlier this month that it delivered just 11 commercial jets and 11 executive jets in the first quarter, compared to 14 and 11, respectively, a year ago.
Embraer's gross margin improved to 19.9% last quarter from 15.6% a year earlier, as stronger profitability in its executive aviation and defense segments more than offset the drag from fewer commercial aircraft deliveries.
Embraer's commercial jet deliveries dipped last quarter. Image source: Embraer.
On the other hand, the sharp revenue decline made it harder for Embraer to cover its operating expenses. Operating expenses increased last quarter due to factors including higher impairments on used commercial jets and separation costs related to the sale of an 80% stake in Embraer's commercial jet business to Boeing (NYSE: BA). As a result, the company's operating loss widened to $15.2 million from $5.3 million a year earlier, and its adjusted loss per share ticked up by a penny to $0.34. Analysts had expected an adjusted loss per share of $0.13.
A question of timing
While Embraer's sharp revenue decline and big loss may seem jarring to investors, it's important to remember that the first quarter tends to be seasonally weak for the company. Furthermore, the timing of aircraft deliveries can have a big impact on revenue and profitability.
Despite delivering just 11 commercial jets last quarter, Embraer still expects 85 to 95 deliveries for the full year. That means Embraer should be better able to cover its fixed costs in the last three quarters of 2019. In fact, as of May 16, Embraer had already delivered 15 commercial jets in the second quarter.
Timing factors also made the executive jets business look less healthy than it truly is. Executive jets segment revenue totaled just $117 million last quarter, but Embraer booked more than $300 million of new orders during the period, boosted by the popularity of the new Praetor 500 and Praetor 600 models, which will become available later this year.