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Boeing, Embraer Sign Commercial Aviation JV Worth $4.8B

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The Boeing Company BA and Embraer S.A. ERJ have recently entered into a joint venture (JV) by signing a Memorandum of Understanding, which would offer the former a controlling stake at Embraer’s commercial jet business. Per the terms of the transaction, Boeing will hold an 80% ownership stake in the JV, whereas Embraer will own the remaining 20% stake.

The non-binding agreement, signed by both the companies, values Embraer's commercial aircraft operations at $4.75 billion, with Boeing's stake in the JV worth $3.8 billion.

Details of the Agreement

In particular, the JV proposes the strategic alignment of Embraer’s commercial aircraft and services business with Boeing's commercial development, production, marketing and lifecycle services operations.

Once finalized, the JV will be led by Brazil-based management, while Boeing will have operational and management control of the same.

The definitive agreement, including the financial and operational details pertaining to the partnership, is expected to get finalized in the upcoming months, subject to shareholder and regulatory approvals, approval from the Government of Brazil and other customary closing conditions. Once approved, the entire transaction is expected to close by the end of 2019.

Benefits of the Proposed Joint Venture

The commercial aviation JV represents the biggest realignment in the global aerospace market in decades, further strengthening Boeing’s commercial business’ against its arch rival Airbus EADSY and the emerging aerospace companies from China, Russia and Japan. The proposed partnership is expected to be accretive to Boeing's earnings at the start of 2020 and generate estimated annual pre-tax cost synergies of approximately $150 million by the third year.

The proposed joint venture clearly looks to establish a strategic partnership that will be beneficial for both the companies in bolstering their positions in the global commercial jet market. The venture aligns with Boeing's long-term strategy of investing in organic growth and returning value to shareholders, complemented by favorable strategic arrangements. On completion, this strategic alliance will offer a comprehensive commercial airplane portfolio ranging from 70-450 seats along with freighter aircraft, and best-in-class products and services to serve the global customer base.

Further, the partnership is expected to improve Embraer’s cash position by approximately $1 billion once the deal closes, creating more investment opportunities in upcoming projects. This, in turn, will bolster the growth of the JV as well as that of Boeing, eventually.

Another JV in the Line

Both Boeing and Embraer plan to create another JV for developing new markets and applications for various defense products and services, especially the KC-390 multi-mission military aircraft, based on jointly-identified opportunities. Additional investments in the global marketing of the KC-390 along with a series of agreements in the fields of engineering, research and development, and the supply chain will enhance both the companies’ footprint in the global military aircraft market.

Our View

Once the commercial aviation JV agreement closes, both Boeing and Embraer will benefit from a broader operational scale, additional resources and worldwide footprint that will enable them to win more contracts from varied airlines across the globe. Notably, the strategic venture will offer stiffer competition to the C-Series jets designed by Canada's Bombardier Inc. and supported by Airbus.

On the commercial front, Boeing estimates demand for 41,030 new planes, worth $6.1 trillion in the next two decades. These projections must have encouraged the two jet makers to strike such a strategic JV, which on completion should further allow Boeing to continue maintaining its position as the largest commercial jetliner manufacturer in the world.

Price Movement

Boeing’s stock rallied about 65% in a year compared with the industry’s growth of 27.8%. The outperformance was primarily led by the robust worldwide demand for its commercial aircraft and military jets.

Zacks Rank & Key Pick

Boeing currently carries a Zacks Rank #2 (Buy). Another top-ranked stock in the same space is Northrop Grumman NOC, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Northrop Grumman delivered an average positive earnings surprise of 13.87% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen by 6.24% to $16.50 in the last 90 days.

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Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
Embraer-Empresa Brasileira de Aeronautica (ERJ) : Free Stock Analysis Report
The Boeing Company (BA) : Free Stock Analysis Report
Airbus Group (EADSY) : Free Stock Analysis Report
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