Wolfe downgrades Embraer amid its record valuation on tariff risks

Investing.com -- Wolfe Research downgraded Embraer to Peer Perform from Outperform after the shares have doubled over the past year, citing potential tariff risks and limited upside at current levels.

Embraer stock surged about 100% over the past year, driven by improved operational performance, strong free cash flow, and a growing order backlog.

The stock recently hit a record high of $56, surpassing its previous peak in June 2007. However, Wolfe notes that the current valuation—around 11.5 times forward EV/EBITDA—is near the high end of its historical range.

Wolfe highlighted a key risk: potential U.S. tariffs set to be announced on April 2, which could significantly impact Embraer’s costs.

While Brazil currently does not impose tariffs on imported aircraft, a country-level tariff of around 8% is expected, along with the possibility of a 20% VAT.

This could affect Embraer’s U.S. commercial aircraft imports and spare parts, potentially adding up to $300 million in tariffs—equivalent to about 60% of its 2025 pretax profit.

Although the final outcome remains uncertain, as big tariffs out of the gates could be curbed quickly and products could be excluded as the Trump administration looks for deals/concessions but Wolfe said that Embraer shares have not factored in these potential risks.

The firm noted that while some aerospace peers like Bombardier (OTC:BDRBF) and Textron (NYSE:TXT) have seen their shares drop this year due to similar concerns, Embraer’s stock remains unaffected.

With the stock reaching Wolfe’s prior price target of $53 and limited upside amid potential tariff headwinds, the firm sees a more balanced risk-reward profile and has shifted to a neutral stance on Embraer.

“While we continue to see a positive outlook, with ERJ hitting our prior price target and a highly uncertain, but potentially impactful tariff hit on the horizon, we are downgrading shares to Peer Perform from Outperform,” analyst at Wolfe said in the note.