Tariff Pivot Eases Embraer's Headwind, But Execution Overhang Persists

What happened

The Trump administration has enacted a revised tariff regime, which Reuters reports could benefit Embraer by reducing import costs on aircraft sold in the U.S. This addresses a key headwind from the DeepValue report, where U.S. tariffs were estimated to cost $70-80 million annually and add ~$1.8 million per aircraft, impacting competitiveness in North America, which made up 59.1% of 2024 revenue. However, Embraer's investment thesis remains focused on converting its record $31.6 billion backlog into deliveries, with supply-chain disruptions and customer credit risks as primary constraints. Recent backlog renegotiations, like Azul's Chapter 11-driven order cut, highlight vulnerabilities in backlog quality and execution stability. While tariff relief may lower cost pressures, the critical drivers for stock performance are still production leveling progress and the absence of further customer distress in 1H26.

Implication

1. Tariff reduction may save Embraer up to $80 million annually, potentially improving gross margins and easing pricing pressure in its largest market. 2. This external benefit does not address internal challenges like supply-chain bottlenecks, which management cites as the main barrier to restoring pre-pandemic delivery levels. 3. With the stock trading at 41.6x P/E, any positive sentiment from this news might be overblown, as valuations already reflect strong backlog momentum. 4. Key risks remain, including customer concentration and potential further renegotiations, which could undermine backlog quality and delivery schedules. 5. Thus, while tariff relief is a positive development, it does not justify entry at current prices; investors should wait for proof of operational improvements, such as stable 1H26 deliveries, or a pullback to $55 as per the DeepValue report.

Thesis delta

The tariff pivot reduces a material external cost pressure, enhancing Embraer's competitiveness in North America and slightly lowering downside risk. However, it does not shift the fundamental investment thesis, which remains centered on execution risks like backlog conversion, production leveling, and customer stability. Therefore, the DeepValue report's 'WAIT' rating and emphasis on 1H26 evidence for entry are still valid.