On Tuesday, Embraer (NYSE:ERJ), a prominent aerospace company, experienced a shift in its stock rating. An HSBC analyst downgraded the company from a Buy to a Hold status, despite increasing the price target to $19.00 from the previous $18.00. This adjustment comes amid concerns about supply chain pressures that are affecting the delivery of both commercial and executive jets.
The analyst pointed out that Embraer's fourth-quarter performance in 2023 was indicative of the challenges posed by supply chain constraints, which had a notable impact on aircraft deliveries. These issues are expected to continue into 2024, with a potential for improvement projected to start in the second half of the year and continue into 2025. The decision to downgrade was influenced by these delivery pressures, although the target price was raised due to a lower weighted average cost of capital (WACC).
Embraer's delivery numbers for 2023 fell short of the company's own forecasts. The company managed to deliver 64 commercial jets against a guidance range of 65 to 70, and 115 executive jets compared to the expected 120 to 130. These lower delivery figures have been linked to ongoing engine supply issues faced by Pratt & Whitney (P&W), particularly with its GTF engines that are used in Airbus A320/A321neo aircraft.
The report further explains that P&W's current focus on addressing problems with its GTF engines and supporting airlines with Airbus neo fleets could indirectly limit the availability of engines for Embraer's commercial and executive jets. Additionally, the growing competition from Airbus's A220 family aircraft, which directly competes with Embraer's E2 jets, is another factor that could keep delivery numbers under pressure throughout 2024.
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