Boeing, Embraer Announce Regional Jet Joint Venture

Wide-moat

Boeing plans to make a cash payment of $3.8 billion to Embraer, implying a $4.75 billion valuation. This valuation results in an 18 times EV to EBIT multiple based on our 2018 forecast for the regional jet unit’s operating profit. However, we think profits are depressed due to the E2 ramp, and the valuation multiple sits at a more reasonable 15 times our normalized operating profit before any cost synergies. This all suggests that Boeing didn't get the business cheap but neither did it grossly overpay; Boeing shares were flat on the news.

We continue to believe that the tie-up is attractive for Boeing because it gives the U.S. company access to Embraer’s engineers for its next aircraft development program and provides additional manufacturing locations/options outside of Washington state. If the tie-up is consummated, we think the launch of Boeing’s next generation midsize aircraft is more likely. We don’t expect to make material changes to our Boeing fair value estimate of $309. Embraer shares are trading down double-digit percentages, but we’re holding off on a decreasing our fair value estimate of $25 on the ADRs given the uncertainties surrounding government approval. That said, testing the JV set-up in our model indicates that it will shave about 5% off our fair value estimate for Embraer.

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