A Brazilian Bet on China

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

But Embraer’s fortunes are changing. Two weeks ago, Embraer announced the sale of 100 aircraft to HNA Group, China’s fourth-largest airline. The list price value of the 50 ERJ 145 and 50 Embraer 190 aircraft? A cool $2.7 billion. That’s about 74% of what Embraer sold in all of 2005. The Chinese purchase raised Embraer’s firm orders by about 25% to $13.6 billion — all in one fell swoop.

And more good news may be in the pipeline. German newspapers recently reported that Germany’s biggest airline, Lufthansa, is revamping its aging fleet. And there are indications that the airline is in negotiations with the Brazilian manufacturer for the purchase of 60 new short-range aircraft. The decision may come as soon as Sept. 20. That could add another $1 billion-plus to Embraer’s order book.

With 93% of Embraer’s 2005 sales coming from outside of Brazil, it’s ironic that the company has struggled to sell passenger jets in its own domestic market. This oddity may be about to change, as well. Brazil’s state-owned development bank soon may be offering a special credit line to domestic airlines seeking to buy passenger jets made by Embraer. Brazil’s leading airline, TAM Linhas Aereas (TAM), already has expressed interest in acquiring some planes from Embraer as it looks to expand its regional routes.

Finally, Embraer is well-positioned to benefit from the coming boom in global sales of executive jets — a market that’s expected to reach $158 billion within a decade. Just last week, new air taxi service Magnum Jet announced that it would acquire 50 of Embraer’s Phenom 100s in a deal worth $137.5 million — based on the list price for the aircraft — with an option to acquire 50 additional Phenom 100s.

Despite a recent run up in Embraer’s stock price, it is only back to where it was prior to the emerging market bloodbath that took place during the early summer. Since then, the company has booked well above $2 billion in additional firm orders. So there is plenty of room on the upside for this stock.

So buy Embraer (ERJ) at market today, and place your stop at $34.75. Option players should buy the January $40 calls (ERJAH.X).


To make room for this week’s pick, close your position in BHP Billiton (BHP). Although we are bullish on the long term prospects of this diversified commodities play, the stock has been locked in a trading range since mid-May. This week’s pick offers better opportunities for quick, short-term gains. Also, move your stop in Millicom (MICC) to $35.75.

We were stopped out of Acergy (ACGY) this morning and took an 8% gain on the stock. We previously sold half of the Acergy stock that we owned on July 31 to reap a 13% gain, while selling one-quarter of our position on Aug. 21 to collect a 19% gain. We also sold our Acergy options on Aug. 21 to notch a 76.3% return.

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