Analysis: U.S. deal has Brazil's Embraer flying high in defense

Thu Feb 28, 2013 3:24pm EST
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By Brad Haynes

SAO PAULO (Reuters) - With its first-ever U.S. military contract in hand, the defense unit of Brazilian planemaker Embraer SA (ERJ.N: Quote) has finally hit the big time, establishing itself as a global player while the rest of the industry struggles with shrinking budgets.

The light attack plane that Embraer will supply for the United States in Afghanistan handily illustrates how the company, which is best known for the regional jets it supplies to airlines such as JetBlue Airways Corp (JBLU.O: Quote), is climbing the ranks of the world's top 100 arms dealers.

A rugged design and low cost make Embraer's Super Tucano popular in counterinsurgency missions from Africa to South Asia, where resource wealth has spurred new defense spending amid austerity in Europe and the United States.

The focus on frontier markets and expanding ambitions for Brazil's armed forces have made Embraer one of the few planemakers outside of China that are growing, thanks to the outperformance of its defense operations.

"Is there anyone else this bullish on defense? Certainly nothing that a U.S. investor can bet on. Nothing in this hemisphere," Deutsche Bank defense analyst Myles Walton said in an interview. "Embraer is the foundation of the military industrial complex in Latin America, through a combination of execution, luck and being the right company at the right time."

Embraer shares in Sao Paulo (EMBR3.SA: Quote) touched a five-year high on Thursday after the Pentagon awarded the contract late on Wednesday. The stock later retreated slightly as analysts said impending cuts to the U.S. defense budget would make the Air Force less likely to exercise options for more planes.

Embraer's defense division expects to increase revenue by as much as one-third this year, compensating for slipping deliveries to commercial airlines and a string of canceled private jet orders.

The Brazilian defense boom is also luring powerful partners for Embraer, from the helicopter unit of Italy's Finmeccanica SpA SIFI.MI and Israeli drone maker Elbit Systems Ltd (ESLT.TA: Quote) to Boeing Co. (BA.N: Quote), which has stepped up work with Embraer noticeably over the past year.   Continued...

Super Tucano combat planes fly during a ceremony to mark the 93rd anniversary of the Colombian Air Force at the military base in Bogota November 9, 2012. REUTERS/John Vizcaino