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Why Shares of Embraer Are Up Today

By Lou Whiteman – May 29, 2020 at 11:56AM

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Jilted by Boeing, Brazil's plane maker apparently has other options.

What happened

Shares of Embraer (ERJ 1.08%) spiked 17% on Friday following a report that a Chinese manufacturer has expressed interest in joining forces with the world's third-largest commercial airplane manufacturer. Embraer was left at the altar by Boeing (BA -1.05%) just last month, but it appears to have other options.

So what

Brazil's Embraer is a maker of small commercial jets, and until recently had a deal in place to sell 80% of its commercial operations to Boeing for $4.2 billion. That valuation arguably did not reflect the post-COVID-19 reality of commercial aerospace, with airlines scrambling to cut costs and cancel expansion plans. But there is still value in Embraer's portfolio.

Embraer E195-E2 on the tarmac.

Image source: Embraer.

Reuters reported Friday that aerospace manufacturers including China's state-owned COMAC have voiced an interest in forming an alliance with Embraer, and companies in Russia and India have also conveyed interest.

There's logic in a deal for both sides. COMAC and Russia's Irkut are both trying to develop planes to rival mainstay offerings from Boeing and Airbus (EADSY -2.58%) and attempt to undo a global duopoly in mid-sized aircraft. Embraer has established engineering talent and technology used on its popular ERJ smaller jet series and would lend credibility to those efforts.

A deal would also give Embraer added heft as it attempts to sell its new generation of E-Jet planes against similarly sized Airbus A220 aircraft.

Now what

Investors should be warned that the talks appear preliminary, and it is possible a deal with either China or Russia would face pushback from the United States and other Western nations.

But if a tie-up does happen, the big loser would appear to be Boeing. Not only would an alliance with Embraer help the Chinese or Russians manufacture a credible rival to Boeing's offerings, it would mean there are two strong competitors -- Embraer's E-Jet and Airbus' A220 -- in a segment of the market where it has no real alternative to offer.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Embraer S.A. Stock Quote
Embraer S.A.
ERJ
$9.32 (1.08%) $0.10
The Boeing Company Stock Quote
The Boeing Company
BA
$126.00 (-1.05%) $-1.33
Airbus Stock Quote
Airbus
EADSY
$21.30 (-2.58%) $0.56

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