Shares of Brazilian planemaker Embraer S.A. (ERJ 2.99%) 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 +0.00%).
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.
