In the Fast Money post, Fallen Foreign Buys, which emerging-market ticker does trader Tim Seymour actually like?

I wouldn’t go blanket shopping says Fast Money’s favorite emerging markets trader, Tim Seymour. However there are some opportunities. I like *Embraer (ERJ) because their order ratio is at an all time high.

This article was originally published at RealMoney on September 26, 2007.

My article last week about mining the PPI report for stock ideas was so well received I thought I’d share another of my favorite taxpayer-provided idea generators, the durable goods report. Published by the U.S. Census Bureau, the report has a similar breakdown by industry of durable goods orders, shipments, inventories and backlog.  I came away with 28 potential ideas for further research.

In line with much of the recent economic data, the headline durable goods number was weaker than expected. To quote from the report, “New orders for manufactured durable goods in August decreased $11.3 billion or 4.9 percent to $219.5 billion, the U.S. Census Bureau announced today…. Shipments of manufactured durable goods in August, down two of the last three months, decreased $3.4 billion or 1.6 percent to $216.7 billion.”

But in this case, I think focusing on the forest means you could miss out on some of the more attractive trees. I gathered the data from the Census Bureau and created charts showing the year/year change in durable goods statistics for a variety of industries hoping to find some areas worth further consideration. Keep in mind, this is an initial screen for idea generation, not a full-fledged analysis of any of the names. You wouldn’t want to buy the stocks listed here without further research. That caveat aside, let’s look at some of the better performing industries.

First up is technology – computers and electronic products. Although 3.3% order growth year/year and essentially flat shipments may not be the type of growth investors typically look for from tech, it is a clear improvement from recent months. Inventories are starting to be drawn down and backlog remains strong.

But there are areas of strength and weakness within tech. Specifically, computers (and related products) themselves are starting to look strong, with backlog headed through the roof and inventories in check.

The fairly obvious stock ideas from this industry include Apple (AAPL), IBM (IBM - Annual Report) and Hewlett Packard (HPQ - Annual Report). If things keep getting better (and the company figures out how to file its required regulatory reports) Dell (DELL) might even look interesting again. Stretching a bit further, Sun Microsystems (a href="http://stockmarketbeat.com/blog1/category/tech/sunw/">SUNW - Annual Report) and Lexmark (LXK) come to mind. And don’t forget the storage plays, which also showed up on the PPI hotlist. The names I mentioned then were Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), SanDisk (SNDK - Annual Report), Seagate (STX - Annual Report) and Western Digital (WDC).

Communications equipment is also showing some signs of strength. Though the latest month was down, the trend seems to be up.

I have actually analyzed Motorola (MOT - Annual Report), so that would be a play to include here. Cisco (CSCO), Research in Motion (RIMM), 3Com (COMS), Nokia (NOK) and Corning (GLW - Annual Report) also come to mind.

And finally, turning away from technology, I hope you didn’t think the aircraft boom was over. If anything, it looks to be picking up steam.

Ways to play this include Boeing (BA - Annual Report), Embraer (ERJ), General Dynamics (GD - Annual Report), United Industrial (UIC) and Cessna parent Textron (TXT). Parts suppliers include Rockwell Collins (COL), Curtiss Wright (CW - Annual Report), and LMI Aerospace (LMIA).

So there you have it: 28 potential stock ideas from what looked at first glance to be a negative report on durable goods.

Disclosure: Long RIMM put options at time of publication.

Embraer (ERJ), the world’s leading manufacturer of commercial jets up to 120 seats, recorded net sales of US$843.4 million, in the first quarter 2007 (1Q07) and net income of US$26.2 million, equivalent to diluted earnings per ADS of US$0.1412. Analysts had been expecting the company to earn $0.40 on $853 million in sales. As was reported a month ago, the miss resulted from production issues.

Due to difficulties with the supply chain of the EMBRAER 170/190 family, Embraer delivered 25 aircraft during the first quarter of 2007, compared to 27 deliveries during the same quarter in 2006. Furthermore, the Company’s industrial costs increased as a result of longer production lead time and higher man/hour labor costs in its production process, including those related to overtime work, in order to achieve the scheduled deliveries.

Given that the shares rallied when the company reported the initial production levels last month, investors may fairly wonder why the shares are dropping on today’s news. Obviously the report last month was just aircraft - not revenue or earnings. And analysts were able to get fairly close to the right revenue number but still fell way short on earnings. In part it is likely that the estimates didn’t properly reflect operating leverage - it is something all too frequently underestimated. However, a good part of it was related to the efforts made to stem the production issues. As the company reported:

In order to be better prepared for the expected production ramp-up in the coming quarters, Embraer has hired approximately 2,000 employees, since January 2007 all of which engaged in a training program. Since the costs
related thereto are accounted for as “industrial costs”, the Company’s gross margin for the quarter was adversely affected. Most of the new employees will be working a third shift, to be fully implemented during the third quarter of 2007. The training program can last up to 90 days, and all employees are coached by experienced professionals.

It sounds expensive, and clearly it was. It is also highly unlikely that they caught Embraer management entirely by surprise. It would have been a good idea for the company to give a heads-up regarding the extra costs when they reported the production levels in April.

Embraer Has Military Transport Aircraft Under Study

Embraer (ERJ) confirmed, at a press conference held today, during the Latin America Aero & Defense (LAAD) conference, in Rio de Janeiro, that it has been studying the possible development of a military transport aircraft. If it is actually launched, the EMBRAER C-390, as it is called, will be the heaviest airplane ever produced by the Company and will be able to transport up to 19 tons (41,888 pounds) of cargo. The new project will incorporate a number of technological solutions developed for the successful EMBRAER 190 commercial jet.As a medium-sized military transport jet, the EMBRAER C-390 will have an ample cabin, equipped with a rear ramp for transporting a wide range of types of cargo, including wheeled armored vehicles, and will have the most modern loading and unloading systems.

The military market is quite different from commercial aircraft, and Boeing (BA - Annual Report) and Airbus (EADSF.PK) are already fighting bitterly over the larger jet orders in both military and commercial segments. However, as Toyota and Daimler demonstrated, it is often easier to come in at the low end and move up than to move down from high end products into more economical lines.

We also suspect there are a large number of smaller governments who would like to place their military orders with an underdog rather than an American or European firm that might leave them with a bad taste of imperialism.

As is often the case with manufacturing something as complicated as aircraft, regional jet maker Embraer (ERJ) recently had some production delays. Although it impacted earnings in 2006, we said “as long as the company can make up for the delay in short order, it should continue to benefit from the strong trend toward smaller jets serving smaller markets.” Today, Embraer Reported First Quarter 2007 Deliveries:

Embraer announces its first quarter 2007 (1Q07) deliveries and Company backlog for the Commercial Aviation, Executive Aviation, and Defense and Government segments.The Company’s firm order backlog increased from US$ 14.8 billion in the fourth quarter of 2006 to a record US$ 15 billion in the 1Q07.

In the same period, deliveries came to 25 jets. Embraer has taken action regarding the supply chain and industrial processes for manufacturing the wings, in order to overcome the difficulties reported last year. The delivery forecast for 2007 is maintained at 165-170 aircraft, of which 40% are expected to be delivered in the first half of the year.

In the first three months of the year, a total of 25 jets were delivered.

Due to our mathematical wizardry, we are able to deduce the forecast for the second quarter as being 41-43 aircraft (the difference between the 25 delivered in Q1 and 40% of 165-170.) The second quarter rate is sufficient to fill the full-year forecast, indicating the company is indeed back on track. In the second half, however, they will also have to make up for the slower Q1.

Last year we wrote an article called Regional Jet Orders Likely to Continue, in which we applauded Embraer’s (ERJ) receipt of an order for 100 regional jets from China’s Hainan Airlines, and predicted the company would see many more orders ahead (which was true.) Over the weekend, an article ran with a headline suggesting such an order, Hainan Airlines venture to buy 100 Embraer jets | Reuters.com:

Hainan Airlines Co., China’s fourth-largest air carrier, and its parent have set up a regional airline which will buy 100 commercial jets from Brazil’s Embraer by 2012, the Xinhua news agency said on Saturday.

That wasn’t an additional order, it was the same 100 planes that inspired us to write our article. The news is more that the regional carrier is now a legal entity and the orders are thus one step closer to actually being fulfilled. It is also not an insignificant win, with China having launched its own regional jet manufacturer - a fact not lost on the Reuters writer:

Regional aviation, also known as feeder-line services, operates between small cities, with routes typically ranging from 500 to 1,000 km. The services usually use aircraft which seat less than 100 passengers, according to Xinhua.China launched production of a 90-seat passenger jet, known as ARJ21, on Friday, its first home-grown regional jet and a major step toward creating a national champion that it hopes could challenge Boeing (BA - Annual Report) and Airbus (EADSF.PK).

A unit of General Electric (GE - Annual Report) will supply engines for the ARJ21, which will compete with aircraft from Embraer and Canada’s Bombardier.

We still think regional jets have a far more important place in the future of aviation than behemoths like the Airbus A380, particularly in China. Embraer is likely to continue to be a strong competitor there, as it will take some time for China to build the capacity to cover its own demand.

As was discussed previously, business and regional jet maker Embraer (ERJ) had production glitches that limited its sales in the last quarter of 2006. While the problem affected sales, earnings came in well ahead of analyst estimates.
Embraer Announces Fourth Quarter and Fiscal Year 2006 Results in US GAAP: Financial News - Yahoo! Finance

Embraer (ERJ), the world’s leading manufacturer of commercial jets up to 120 seats, recorded fourth quarter 2006 net sales of US$1,084.1 million and net sales for fiscal year 2006 of US$3,807.4 million. Net Income for the fourth quarter of 2006 and full-year totaled US$124.4 million and US$390.1 million, equivalent to diluted earnings per ADS of US$0.6698 and US$2.1006 respectively. The firm order backlog as of December 31, 2006, increased 11.3% over the previous quarter totaling US$14.8 billion, a record high.

The consensus estimate was for $0.60 in EPS on sales of $1.22 billion for the quarter and $2.06 per share on $3.89 billion for the year.

In the fourth quarter of 2006, Embraer announced 75 new firm orders for the Commercial Aviation segment and achieved more than 225 new firm orders in 2006. New customers such as Northwest in the USA, Virgin Blue in Australia, Sirte Oil in Libya, Air Caraibes in Guadeloupe and Kenya Airways were added to our firm order backlog in the last quarter of 2006. Sales for the Executive jets segment continue to grow, especially for the Phenom family with more than 350 firm orders as of December 31, 2006. The EMBRAER 170/190 E-jets currently has 619 firm orders and 568 options booked.

Due to difficulties with the production ramp-up of the EMBRAER 190 and EMBRAER 195 aircraft, especially those related to their wing assembly and supply chain delays, 37 aircraft were delivered in the last quarter of the year, and totaled 130 aircraft delivered in 2006. In light of the actions taken to solve these problems and the solutions pursued, Embraer revised its delivery forecast from 150 to 165-170 aircraft in 2007.

As long as the company can make up for the delay in short order, it should continue to benefit from the strong trend toward smaller jets serving smaller markets.

We’ll save our usual “why big jets are unnecessary” comments for those who want to click through to read them. Germany Puts Freight A380 on Ice: Financial News - Yahoo! Finance:

Financially troubled European airplane manufacturer Airbus has stopped work on the freight version of its new A380 superjumbo so it can focus more on the troubled passenger version of the aircraft, a spokesman for its parent company said Thursday.

If that doesn’t say it all, we don’t know what does. The model that doesn’t have significant problems also doesn’t have any customers. Meanwhile, the longer the delays for the passenger version the more likely the plane never gets off the ground.

To be honest we didn’t even know they had one, but Airbus parent EADS has sold its small stake in Brazilian regional jet maker Embraer (ERJ).
.:: Aero-News Network: The Aviation and Aerospace World’s Daily/Real-Time News and Information Service ::.

Europe’s largest aerospace manufacturer has sold it’s 2.12 percent stake in Brazilian aircraft manufacturer Embraer for $163 million.In a statement to the Financial Times, EADS said it had earmarked its investment in Embraer for sale as the group focused “its attention on core matters and projects that will provide future growth opportunities.”

The problem is, as we have noted many times, the growth opportunities are with Embraer and the regional jets. If anything, EADS should have sold its own business and bought the other 98% of Embraer.

We have said often that the future of passenger air travel lies in smaller jets flying to smaller cities. The hub and spoke model is outmoded, and large passenger jets are really only well suited for a few major city-pairs. Meanwhile, the freight market that would have helped to defray the costs (because air freight carriers really do need bigger aircraft) seems to remain tightly locked up.

A good example of the direction we see things going is evidenced by JetBlue’s (JBLU) current plans to offer nonstop service from Westchester County, New York.

The flights would begin in March, county officials said. Airport manager Peter Scherer said the airline is considering routines to Orlando, West Palm Beach and Chicago.

We have generally regarded this trend as positive for Brazilian regional jet manufacturer Embraer (ERJ). However, the current valuation may be a bit stretched if insiders are any indication.

Brazil’s Embraer share offering nearly doubles | Reuters.com

Brazilian aircraft maker Embraer said on Tuesday its proposed share offering will be about twice as large as planned because more of its shareholders decided to join the sale.Embraer, the world’s fourth largest commercial aircraft, said in a filing to Brazil’s securities regulator five of its shareholders will offer 72.9 million common shares. In a December filing, the company said two shareholders planned to offer 43.3 million shares.

With major shareholders all seeming to feel like this is a good time to lighten up, investors should probably be wary about buying right now.