The stock of Embraer SA (NYSE:ERJ, 30-year Financials) shows every sign of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $11.28 per share and the market cap of $2.1 billion, Embraer SA stock is believed to be modestly undervalued. GF Value for Embraer SA is shown in the chart below.
Because Embraer SA is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Embraer SA has a cash-to-debt ratio of 0.52, which which ranks in the middle range of the companies in Aerospace & Defense industry. The overall financial strength of Embraer SA is 4 out of 10, which indicates that the financial strength of Embraer SA is poor. This is the debt and cash of Embraer SA over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Embraer SA has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $4.4 billion and loss of $4.867 a share. Its operating margin of -11.84% worse than 82% of the companies in Aerospace & Defense industry. Overall, GuruFocus ranks Embraer SA's profitability as fair. This is the revenue and net income of Embraer SA over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Embraer SA's 3-year average revenue growth rate is worse than 88% of the companies in Aerospace & Defense industry. Embraer SA's 3-year average EBITDA growth rate is -41.3%, which ranks in the bottom 10% of the companies in Aerospace & Defense industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Embraer SA's return on invested capital is -9.16, and its cost of capital is 3.96. The historical ROIC vs WACC comparison of Embraer SA is shown below:
Overall, the stock of Embraer SA (NYSE:ERJ, 30-year Financials) gives every indication of being modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Aerospace & Defense industry. To learn more about Embraer SA stock, you can check out its 30-year Financials here.
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