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Embraer-Empresa Brasileira de Aeronautica S.A. 3 July 2008

Update Report – 1Q 08 Results

Significant order backlog and on schedule deliveries support future growth

ADR BUY Fundamental research indicates a 19% upside in the ADR over the next 6–12 months. We continue
Direct
to access
value this to the
stock over full report
an investment free
horizon of charge
of 6-12 months asatwe expect a significant currency
Fundamental stock
http://www.iirgroup.com/researchoracle/viewreport/show/20186
impact over the next 6-12 months. We have calculated the target price based on fundamental
factors, using a weighted average of target prices obtained using DCF and comparative valuation
methodologies.
Ticker: ERJ
Target price: US$29.60
Current price: US$24.91 We reiterate the ADR (1 ADR = 4 Brazilian shares) a BUY with a 6–12 month target price of
US$29.60 per ADR.

Brazilian HOLD The Brazilian stock is expected to decrease by approximately 3% over the next 6–12 months as the
19% fundamental upside is offset by approximately 22 percentage point downside attributable to the
Stock anticipated appreciation of the Brazilian real against the US dollar over the same period1.

Ticker: EMBR3.SA
Target price: BRL9.62
Current price: BRL9.95 We reiterate the Brazilian stock a HOLD with a 6–12 month target price of BRL9.62

Supervisor: Mayuresh Kelkar

Analyst: Sagar Shah Investment horizon - short term actionable trading strategies
Editor: Adil Bahar, PhD This report addresses the needs of strategic investors with a long term investment horizon of 6-12 months. If
Global Research Director: this report is provided to you by your broker under the Global Settlement, you may now also access (free of
charge) the short term trading outlook that we publish from time to time for this issuer, looking at the coming
Satish Betadpur, CFA
5-30 days for readers with a shorter trading horizon. These are available online only at
www.researchoracle.com
Next news due:
2Q 08 results, 05 August 2008
Report summary
Embraer-Empresa Brasileira de Aeronautica S.A.’s (Embraer) 1Q 08 revenues were broadly in line with
our estimates as aircraft deliveries was as anticipated. Furthermore, the company’s adjusted2
operating income was significantly below our estimate, primarily due to higher than anticipated
Research & Development (R&D) expenses during the same period. Going forward, we are encouraged
by the strong order backlog and its efforts to improve productivity and delivery schedules of aircraft.
Moreover, we believe the company has a stable workforce which is likely to aid the company to deliver
aircraft orders on time. Therefore, we remain optimistic about the company’s target of delivering 195-
200 jets, plus 10-15 Phenom 100 executive jets in FY 2008. Greater R&D costs are likely to increase
the company’s input costs in the near term, restricting the company’s operating margins. However, the
above mentioned positives are likely to offset declining margins over the same period.

Currency impact for US investors

The company reports in US dollars, which we assume is its major trading currency. Earnings forecasts
are, therefore, also expressed in US dollars. Although the company may have costs as well as revenues
in other currencies, we assume that the net risk is minimized through effective hedging strategies. As
a result, the impact of currency movements on the price of the ADR is assumed to be neutral.
Wherever specific currency risks are identified, these will be highlighted in the report.

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