Opinion on  EMBRAEREmpresa Brasileira de Aeronutica S.A. (ERJ)     Sector: Capital Goods  >  Industry: Aerospace & Defense
Embraer a top class BRIC high-growth stock

Embraer ( Empresa Brasileira de Aeronutica SA - ERJ) is a major Brazilian aerospace manufacturer. But don't let the fact that it's based in a developing economy deter you from this opportunity. The fact that the company mainly exports to places like North America and Europe means that the company isn't as exposed to the volatile fluctuations in Brazils economic situation. The company is one of Brazil's major exporters, and could benefit enormously from Brazil's growing economic and trading power (Brazil currently has a trading surplus of US$30Bn, rather than a trade deficit , as it had in the 1990s). In the event of an increase in the popularity of aviation or tourism in Latin America, Embraer could benefit. The airline manufacturer has recovered well from the September 11th attacks which damaged the industry, and the share price has since grown from $13 to $46 and has managed to continue paying dividends through the troubled period.

Brazil is currently the slowest growing BRIC (Brazil Russia India China) country.  This is mainly due to very restrictive reguations on setting up and operating businesses.  For example it takes 150 days to set up a business in Brazil, due to paperwork.  Brazil is also one of the most eco-friendly countries on the earth, which could help its tourist and international relations credentials.  Brazil has so far not been hit by any SARS/Bird-flu pandemic, as chicken breeding is less common than in Asia.  The huge mass of Brazillian bureacuracy is currently putting the 'brick' on the brake pedal.

On the other hand, the Chinese government has removed all regulations stopping economic growth, including safety, quality and workers rights regulations (think lead-poisoned childrens toys).  Even in government run projects, such as the Three Gorges Dam, cheap, low-quality materials have been used to save on construction costs.  Also, Chinese industry dumps millions of tonnes of raw industrial waste into rivers every year. Air pollution, especially in Hong Kong, is endangering health, and the country takes only halphhazard measures to contain the SARS/Bird-flu virus mutations, putting financial concerns before everything else.

Obviously, neither of these two situations can continue forever.  China's growth rate is artificially inflated by a money-centered government, whereas the Brazillian economy is yet to unlock its full potential.  When Brazil's government abolishes its restrictive practices (its already starting: it will soon take only two weeks to set up a business), we will see Brazil's growth rate rocket.  At the same time, due to European and American pressure, safety, employment and merchandise quality regulations will be put on Chinese goods.  This could slow down significantly the Chinese economy.

Also, Brazillian stocks are very cheap compared to Chinese ones, so you may as well snap them up while you can: some Chinese companies have P/Es of 35+, while Itau Bank's P/E is sensible at just 13.

Good brazilian stocks include ERJ, ITU and UBB.

Good Luck,
~~~~Shane Halloran.