This week’s Stock of the Week has hit some turbulence lately, but it still has the potential to soar.

Gaining Altitude

Embraer S.A. (ERJ), which makes regional and business jets, has been held back by the perception that it is closely tied to Brazil, where it is headquartered and where government instability has been an issue. And it’s true that Brazil’s problems have affected Embraer’s defense business, which fell 40% in 2015, a drop that will have a carryover effect on 2016 earnings. Also, Embraer recently agreed to pay $205 million to US and Brazilian authorities to end a long-standing investigation into bribery allegations.

But there are several reasons why the stock is attractive. Embraer, which competes with Canada’s Bombardier in production of regional jets with 70 to 130 seats, has captured about 80% of new orders in this category since 2013. And the vast majority of Embraer’s overall revenue comes from outside Brazil—about 65% from North America…11% from Europe…12% from Asia and Africa…and only 12% from Brazil. In fact, Embraer makes most of its business jets in Melbourne, Florida.

Although the business-jet market has been weak, commercial jets are doing well and the defense business is improving—as is the Brazilian government’s stability. And Embraer is in a major venture with Boeing to build a brand-new aerial-refueling tanker called the KC-390 that will go head to head with Lockheed Martin’s 60-year-old C-130J. This collaboration with Boeing should help boost sales in the US.

Revenue of $5.9 billion in 2015 will likely rise to just $6.1 billion for 2016 and 2017, largely because of the negative effects of currency issues. But after a big 2016 drop, earnings should grow substantially.

Earnings per ADR: 2017 est./$1.83… 2016 est./$0.86… 2015/$1.48.

This Week’s Expert

parakh-sidSid Parakh is co-portfolio manager of the $365 million Becker Value Equity Fund (BVEFX), Portland, Oregon. BeckerCap.com