Finmeccanica: Empire Building At A Price

| About: Leonardo S.P.A. (FINMY)

Finmeccanica (OTCPK:FINMY) is an Italian conglomerate and part of the Italian large-cap index. Finmeccanica has acquired other companies over the years, but profitability has suffered. To end this Finmeccanica has started a process of reorganization and cost cutting.

Finmeccanica has quite a lot of different activities, ranging from aerospace in separate divisions to transport and IT, but defense is the key sector where they operate.

The origins of Finmeccanica are in the state-owned defense industry. The Italian government is still the largest shareholder with about 30% of the total shares.

This is one of Finmeccanica's strengths, as it is unlikely to go bankrupt, but also its major weakness. Drastic reorganization has been tried before, but the Italian government prevented laying off staff.

The Italian government also used Finmeccanica 'as a dumping-ground for unwanted state assets' as the Economist characterized it.

The Italian government didn't allow job cuts previously, but there seems to be a shift. Probably forced by the dramatic results; in 2012 almost 5% of Finmeccanica's employees were laid off and the road to the return of profitability is visible when looking at the outlines (with your eyes half closed).


Financial Data Sources

All financial data used is published by Finmeccanica. Remarks about the data used:

  • Exchange rate EUR/USD 1.38;
  • Stock price USD 8.79 / EUR 6.37;
  • The Annual Report of 2011 is just incomprehensible compared with the other Annual Reports. Data for 2011 is derived from the Annual Report of 2012.
Corporate 2012 2011 2010 2009 2008
Revenue $23,760.8 $23,898.8 $25,799.1 $25,082.9 $20,751.1
Net income -$1,084.7 -$3,182.3 $1,048.8 $990.8 $857.0
EBIT $322.9 -$2,368.1 $2,110.0 $2,415.0 $2,108.6
EBIT% 1.36% -9.91% 8.18% 9.63% 10.16%
FCF $109.0 $168.4 $598.9 $742.4 $625.1
EPS -1.98 -5.60 1.18 1.56 1.78
Dividend $0.00 $0.00 $0.57 $0.57 $0.57
ROA -2.58% -7.54% 2.45% 2.36% 2.08%
ROCE 1.95% -12.96% 10.75% 12.69% 11.86%
ROE -21.23% -50.09% 10.71% 10.96% 10.13%
Debt/Equity 7.22 5.64 3.38 3.65 3.88

The results are bad, but seem to be improving slightly. Budget cuts by governments have hit Finmeccanica especially hard. The bulk of Finmeccanica's revenue is from Europe.

This article on Finmeccanica is the 10th article on the aerospace industry. The focus is on the aerospace divisions. Finmeccanica has the following structure:

Helicopters: AgustaWestland is the third helicopter manufacturer in the world. Agusta was the old Italian helicopter manufacturer, which has close connections with Bell helicopter, now part of Textron (NYSE:TXT). Westland originates from the United Kingdom.

In 2010 AgustaWestland acquired PZL Swidnik in Poland, which has produced helicopters since the 1950's.

AgustaWestland also has a 40% stake in the Jiangxi Changhe-Agusta Helicopter Joint Venture.

Helicopters 2012 2011 2010 2009 2008
Revenue $5,848 $5,401 $5,029 $4,802 $4,188
EBIT $653 $575 $570 $512 $487
EBIT% 11.16% 10.65% 11.33% 10.66% 11.63%

The EBIT% is in line with other major helicopter manufacturers. The chart is from the United Technologies (NYSE:UTX) article, that describes Sikorsky.

Aeronautics: is composed of several operating companies and joint ventures. The most important are:

Aeronautics 2012 2011 2010 2009 2008
Revenue $4,088 $3,663 $3,876 $3,645 $3,491
EBIT $144 -$1,246 $283 $333 $345
EBIT% 3.51% -34.02% 7.30% 9.13% 9.88%

The huge EBIT drop in 2011 was caused by problems with already delivered components of the Boeing (NYSE:BA) B-787 Dreamliner and to complete orders for the A-380 and other programs.

Space: is an alliance with Thales Group (OTC:THLEY) from France with 2 main activities:

  • A broad spectrum of satellite services and operation in the commercial and defense market;
  • Manufacturing of satellites.
Space 2012 2011 2010 2009 2008
Revenue $1,453 $1,348 $1,277 $1,254 $1,372
EBIT $116 $25 $54 $65 $90
EBIT% 7.98% 1.84% 4.22% 5.17% 6.54%

Other: contains a broad range of divisions. These can be quite large, but considering the focus of the article series on aerospace are not detailed here. The divisions are:

  • Defence and Security Electronics is the largest market for Finmeccanica. The Selex ES Group is Italian/U.K. based and is avionics, electronics and IT. The other branch is DRS Technologies, which is an U.S.-based defense contractor and acquired by Finmeccanica in 2008;
  • Defence Systems, which includes a 50% interest in MBDA, which is the 2nd largest missile manufacturer in the world and a JV with BAE Systems and Airbus;
  • Energy which provides plants and components to produce (nuclear) energy;
  • Transportation, which builds trains, busses, signals etc. This is one of Finmeccanica's problem divisions.
Other 2012 2011 2010 2009 2008
Revenue $13,512 $13,487 $15,617 $15,381 $11,700
EBIT $578 $348 $1,286 $1,281 $879
EBIT% 4.28% 2.58% 8.24% 8.33% 7.51%


Finmeccanica has a lot of issues right now and is not a good long investment at the moment. Neither is it a good short candidate, because of the government link.

Finmeccanica has a lot of work to do before it is investable again:

  • Restructuring the business: preferably divesting activities such as the transport-division;
  • Restoring the profitability by consolidation and integration of acquired business;
  • Generating more revenue and profit from markets where Finmeccanica is underexposed. These include the Asia-Pacific or Middle East; this is one of Finmeccanica's spear points. Last month an Italian navy flotilla visited the Gulf region, thus leveraging Finmeccanica's connections with the Italian government.

The biggest and most valuable asset of FInmeccanica is not by definition manufacturing or services.

Finmeccanica has a huge network of alliances, joint-ventures, participations and other relations with about everybody in the world you can think of in their business lines.

  • Important joint ventures with both Russia and China;
  • Participates in the Eurofighter program;
  • Participates in the Lockheed Martin F-35 program;
  • Participates in MBDA, the 2nd missile manufacturer in the world;
  • Builds components for both Boeing and Airbus;
  • The list goes on and on.

Finmeccanica is worth keeping an eye on. If the strategic plan succeeds, it may grow into a much larger aerospace and defense company. The network and structure is there to participate in all major aerospace and defense projects of the future.

The actions of the Italian government may prevent this however and they are an important actor in this play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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