Shares of Brazilian planemaker Embraer S.A. (ERJ 3.96%) took off like a rocketship Tuesday morning, reaching nearly as high as 18% at one point -- and the stock is holding onto most of those gains. As of 2 p.m. ET, Embraer shares remain up a strong 16%.
And it might even be a bargain at this higher price.
Image source: Getty Images.
This morning, Embraer announced that the long-anticipated spinoff of its Eve urban air mobility solutions subsidiary -- which builds electric "air taxis" for commuting within and between cities -- is a go. In a deal valued at $2.9 billion, Embraer will spin off Eve to join with special purpose acquisition company (SPAC) Zanite Acquisition Corp (ZNTE).
Once that's done, Eve will go public on the New York Stock Exchange as a stand-alone company called New Eve.
But here's the thing: Even after spinning off its subsidiary, merging it with another company, and taking it public, Embraer will retain an 82% interest in New Eve. And if New Eve actually does achieve the $2.9 billion valuation that is anticipated for it, then Embraer will own $2.4 billion worth of New Eve (i.e., 82% of $2.9 billion), even as Embraer's own market capitalization tips the scales at less than $3 billion.
The value proposition here is obvious. Buying Embraer stock today at a $3 billion valuation basically equates to buying New Eve stock at a fair, market price -- and getting the rest of Embraer for just $600 million or so, for a company that, over the past 12 months booked $25.2 billion in revenue, earned $2.4 billion in gross profit on that revenue, and generated $295 million in real free cash flow in the middle of a pandemic.
I don't know about you, but buying a company churning out $295 million in annual cash profits for an implied market capitalization of just two times that -- $600 million -- kind of sounds like a bargain to me.
