Pullback In Embraer Offers 'Near-Free Option' On Upside Potential, Morgan Stanley Says In Upgrade

Embraer SA (ADR) ERJ shares have pulled back since the company announced a commercial aircraft and services partnership with Boeing Co BA in July, prompting Morgan Stanley to become more constructive on the stock.

The Analyst

Analyst Josh Milberg upgraded Embraer from Equal-weight to Overweight and upped the price target from $20.90 to $23.50.

The Thesis

The 29-percent decline in Embraer shares since July 5 has brought the shares back to the levels where they traded before the Boeing partnership was first announced in late 2017, Milberg said in the upgrade note. (See the analyst's track record here.)

The market is attributing very little value to the company's executive and defense divisions, the analyst said. And the market is discounting the possibility of the deal being blocked, he said.

The deal timeline is tight, as the company seeks both golden share and shareholder approval before the end of the year, Milberg said.

"Given that amount and net debt of $3 per share, we believe ERJ's shares (now at $19) present low downside risk, and offer a near-free option on upside potential for a turnaround in [the] executive and defense divisions."

Embraer is likely to return to psoitive EBIT generation in the executive and defense divisions, Milberg said, citing a discussion with Michael Amalfitano, head of Embraer's executive division, as well as confidence in a better global business jet environment.

Morgan Stanley assigned a $6-per-share enterprise value to the division.