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Why Embraer Stock Popped 13% This Morning

By Rich Smith – May 26, 2020 at 12:38PM

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When things are this bad, even a little good news goes a long way.

What happened

That Global airlines are in trouble is not exactly news. As passenger traffic dries up in the Age of Coronavirus, and airlines ground their air fleets, this also isn't great news for manufacturers of airplanes.

Perhaps this is the reason that even just a little good news went a long way for Brazilian plane maker Embraer (ERJ -9.11%) this morning, which saw its stock price shoot up nearly 13% (and it's still up a good 7.5% as of 12:15 p.m. EDT) on news not even of a new airplane sale, but simply the conversion of an existing order for a couple of airplanes into an order for some slightly bigger airplanes (and hopes for the sale of some more).

Side view of Embraer E190 jetliner.

Image source: Embraer.

So what

In a press release this morning, Embraer announced that African airline Congo Airways has converted a firm order for two of its E175 passenger jets into an order for two larger E190-E2 jets instead, with the option to buy two more.  

In a statement, Congo Airways CEO Desire Bantu noted that "we have now reached [the] point [where] we may need to make an additional order for E2s." And as Embraer advised, if the options for the two additional airplanes are in fact exercised, the total value of the four planes to be purchased would be $256 million at list prices.

Now what

Granted, as aerospace industry investors are aware, no one ever pays "list price" for airplanes -- and almost certainly not in a buyer's market such as this one! Chances are, by the time these airplanes are actually delivered, the actual money Embraer gets for them will be quite a bit less than $256 million. Still, just seeing that someone is still buying some airplanes for some price, in this environment, must feel encouraging for Embraer investors today.

With Embraer shares trading for less than 15 times forward earnings, investors seem to be willing to bet that as the coronavirus gets under control and people resume flying again over time, more sales will follow.

Rich Smith owns shares of Embraer Brazilian Aviation Co. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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