RBC Capital Markets still expects that Embraer SA (NYSE: ERJ) will retains its Regional Jet crown as the market share leader in the medium term, despite several new rivals entering the market most notably Bombardier’s CSeries.

However, if Embraer is to remain competitive in the Regional Jet arena it will need to respond to the CSeries at some point in the near future. On the Business Jet side we think Embraer will continue to be a rising star but our main concern for the stock remains the foreign exchange headwind, which we suspect will persist over the next 12 months, said Robert Stallard, an analyst at RBC Capital Markets.

Stallard said Embraer regional jets now sit on a near record approximate 2.7 year backlog. In his view, Embraer currently enjoys a superior Regional Jet (RJ) portfolio compared to its competitor, but this may not be so in five years.

Stallard said a key issue hanging over Embraer is how it plans to respond to its competitor's new RJ, the CSeries, and the several new players entering the market in the next few years. The company has said that it will announce its decision later this year, but after Boeing Co.'s (NYSE: BA) expected announcement on its narrow-body plans.

Stallard said that Embraer will likely emerge as a winner in the small- and mid-cabin bizjet segment this aero upcycle as the company’s Phenom 100 and 300 aircraft steal market share in the small-cabin area and the upcoming Legacy 450 and 550 help it enter the lower end of the mid-cabin segment.

However, in the near-term, Stallard still expects some just marginal improvements in the small-cabin bizjet segment as a whole despite Embraer’s strong positioning in the area. With the Legacy 450 and 550 set to see first delivery over the next 12 months, he thinks management will look to launch a new bizjet program focused on the higher end of the mid-cabin segment.

While Stallard views Embraer as well positioned in its aerospace end-markets in the mid to long term, he thinks the situation with Brazilian inflation and the U.S. Dollar/Brazilian Real exchange casts significant clouds over the company’s stock performance in the near term.

Historically, the company has shown strong correlation to the U.S. Dollar/Brazilian Real exchange rate. Nearly 85 percent of the companies sales are in U.S. Dollars, while about 25 percent to 30 percent of costs are in Reals and unhedged. A 10-cent change in the foreign exchange rate translates to about a 1 percent shift in gross margins according to management.

Given the macro uncertainties with regard to the foreign exchange rate and the potential wage increases that would be needed to keep pace with inflation, we remain skeptical that Embraer, despite its strong fundamental growth story, will be able to out pace its Aerospace Original Equipment Manufacturer/Manufacturing (OEM) peers, said Stallard.

Embraer stock is trading up 0.34 percent at $32.67 on the NYSE at 10:14 am EDT.

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