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Why Embraer Stock Popped 15% This Morning

By Rich Smith – Jun 3, 2020 at 3:03PM

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Investors are getting optimistic, but is it too soon?

What happened

Another day, another sharp move higher for Embraer (ERJ -6.99%) stock. Shares of the Brazilian planemaker are up 9% at 2:30 p.m. EDT, and had topped 15% earlier in the day. But why?

As my fellow contributor Lou Whiteman pointed out earlier today, there's word of green shoots emerging in Brazil, Embraer's home country, with Rio de Janeiro making early moves toward reopening tourist attractions and other businesses.

A rendering of Embraer's E190 jet.

Image source: Embraer.

So what

That sounds like it should be good news for Embraer, and is probably one reason Embraer stock is rising today. But what the company really needs at this point is for airplane demand to revive, so that airlines will resume buying airplanes from Embraer.

The problem is -- as Lou also explained -- South American airlines in general and Brazilian airlines in particular are in dire straits right now, with Chile's Latam Airlines Group and Colombia's Avianca Holdings both currently stuck in bankruptcy court. By its very nature, bankruptcy tends to imply a lack of cash with which to buy new airplanes -- and that's not great news for Embraer.

Meanwhile, the coronavirus continues to take a toll on Brazil's economy in general. Until that changes, I don't see much in the way of prospects for the Brazilian economy reopening, or Brazilians resuming travel.

Now what

But what about Embraer's talks with a multitude of potential partners in China, India, and Russia, you ask? Don't those promise the prospect that Embraer will get bought out, and investors will be paid a premium for the privilege of selling their shares?

I don't think so.

As I explained yesterday, those rumored talks are "still in an embryonic stage" and, even if they come to fruition, Embraer is really only looking for small-scale partnerships with foreign companies on individual projects. It's not looking to sell the entire company, as it was in the now-defunct Boeing deal.

Embraer investors, so eager to buy the stock today, shouldn't look for a big payout anytime soon.

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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Stocks Mentioned

Embraer S.A. Stock Quote
Embraer S.A.
$8.91 (-6.99%) $0.67
Avianca Holdings S.A. Stock Quote
Avianca Holdings S.A.

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