Shares of Embraer (NYSE:ERJ) climbed 14% on Thursday morning after the Brazilian aerospace company laid out its long-term vision for the market, its most complete statement since Boeing (NYSE:BA) walked a way from a deal to buy much of the company earlier this year.
In an investor presentation, Embraer outlined its commercial market outlook, and made its argument for why its smaller, more fuel-efficient E2 jets have an important role to play in that future. The company believes that airlines after the pandemic will focus on smaller, more versatile aircraft to match weaker demand.
The company said it is already seeing the early retirement of older, less efficient aircraft, and believes planes like the E2 will be in demand to replace those aircraft as demand recovers.
"The short-term impact of the global pandemic has long-term implications for new aircraft demand," Arjan Meijer, CEO of Embraer's commercial division, said in a statement. "Aircraft with up to 150 seats will be instrumental in how quickly our industry recovers."
If all had gone to script the commercial business would no longer be on its own. Embraer had a deal in place to merge the business into Boeing for $4 billion, but Boeing walked away from that agreement in April due to uncertainty caused by the pandemic. But Embraer in its presentation made its case for why it will be able to go it alone.
On paper, there is a lot for an investor to like about Embraer right now. The E2 is a well-regarded jet, and the company is likely correct in its view that airlines in the coming years will favor smaller jets of its type. The stock is affordable, down 60% for the year and trading at less than 0.4 times expected sales.
But even if Embraer is correct in its forecast, it still faces an uphill challenge. So far, the company hasn't had a lot of luck selling the E2 against Airbus' (OTC:EADSY) A220. The Boeing deal was to help address that, by putting sales of the E2 in the hands of a global salesforce that can match Airbus. Now, the smaller Embraer is on its own.
Many have thought Embraer's best chance was to rework its deal with Boeing, or find another partner, though Meijer in a presentation accompanying the forecast reportedly said commercial is no longer for sale.
The elements of a turnaround are there, but executing is no easy task. It's understandable that investors are intrigued, but they should tread cautiously with Embraer until the E2 starts making good on its potential.