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Post on 16-Nov-2015
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GreenWood Investors LLC www.gwinvestors.com 1
One Page Summary
Share Price 7.62 LTMEV
x Shares 578.1 Sales 15.93 56.8%
= Market Cap 4.4 EBITDA 1.54 5.88x
+ Net Debt (Average) 4.6 EBIT 0.91 9.95x
= Enterprise Value (EV) 9.0 Backlog 36.91 24.5%
Valuation Considerations All figures in billions, except per share amounts
In A Nutshell:In going hunting for bargains in the Italian market, one of the cheapest in the world, a sensitive nose will pick up Finmeccanica as a large-cap opportunity in Italy with substantial room for price appreciation. After a scandal caused management heads to roll, a new CEO has come to the helm with a phenomenal track record and a plan to sell non-core and loss-making divisions, reign in costs and capital spending, improve margins and begin returning cash back to shareholders. Near-term sale catalysts represent over 4.00 per share in near-term upside optionality while barely reducing operating profit (these divisions represent 4% of the LTM EBITDA). Prior to all of these value-creating levers being pulled, the sum-of-the-parts valuation is nearly triple the current stock price, and the company has the cheapest valuation in the aerospace and defense industry. With plans about to be detailed to the investing public in late January, early February, we think timing here (as well as valuation) couldn't be better. European and Italian headwinds are calming down and will at some point turn into tailwinds. Even before they do, we believe shares of Finmeccanica will take flight as a result of a very able pilot guiding the ship back to more favorable air currents and shedding unnecessary pounds. Weve got our carryons stowed and our seat belts on. Starting with the sale of AnsaldoBreda and Ansaldo STS, we anticipate take-off any day now.
Seven Major Reasons We Think Its Our Next Fiat: 1. Excellent CEO with a history of turn-arounds, under government involvement 2. High-quality business units masked by some weaker divisions 3. Active sales process ongoing for weaker divisions 4. Restructuring: Significant cost cutting opportunities 5. EU starkly contrasts to US defense spending, which has only begun to
decline.. Buy Europe, initiatives & rebounding budgets will create slightly favorable environment.
6. Cheaper than cheap European peers 7. Sum-of-the-Parts nearly a triple before margin expansion and cost cutting
Tuesday, December 16, 2014
Quintessential Special Situations: New Management: Turn-around-focused CEO with phenomenal track record
Non-Core Asset Sales: Over 50% of current stock price in net realizable value
Cash Returns: Restructuring to raise margins, de-leverage and reinstate dividend
Confusion: Incorrect Financial Information on Bloomberg, Factset and CapitaliIQ, plus weak
businesses masking best-in-class subsidiaries
Restructuring Plans: Upcoming investor day to discuss new CEOs plans
(FNC IM): Volare
Sum of the Parts (LTM)
Helicopters 11.83 P. 9
Defense 9.52 P. 12
Aerospace 5.39 P. 13
Non-Core Sales 4.02 P. 15
Watch the 5m Pitch!
Macro & Market Considerations: Fish in a Barrel
Upon arriving at Italys stock exchange in Milan, the Borsa Italiana, any visitor or company attempting to access the capital markets is greeted by a giant middle finger in the square directly in front of the entrance. Its a fitting display of art in a country whose labor workers think about their function in an incredibly different way than the typical American worker. US workers will typically be focused on the companys stock price, the value created, and in a very competitive manner, seek to outdo their peers at other institutions. While Italians, particularly in the north, are very proud of their work output, and typically take pains to ensure all the small details have been thought of, its a culture that is far more combative against business owners. As long as they keep their benefits and job protection, they will typically produce best-in-class products. While the country is less than 1% of the worlds population, their dominance in the world of design and luxury (the finer things in life) seems to command an over-sized presence on Fifth Avenue or in the parking spaces of Monte Carlo. Yet, when the economy turns against companies, the wine turns to vinegar. Its incredibly difficult to fire employees, and any attempt to make the workforce more efficient is vehemently resisted by a small minority of unions who try to wreak havoc, with their heads buried firmly in the sand.
In many ways, Italy has deserved the negative reputation it has with global investors, but in so many circumstances, evidence to the contrary of the bear thesis is totally ignored. Companies with the same geographic and product mix (like Ford and Fiat-Chrysler) are priced at opposite ends of
the spectrum. Recently its been hard to turn on Bloomberg or CNBC without hearing some economist talking about how Europe hasnt passed any structural reforms. We suppose translating Italian in the age of Google Translate was so hard, that these talking heads simply ignored the significant labor reform package that passed the Italian legislature in November. It is a multi-1pronged bill that goes above and beyond any reform that was passed in the US during our own recession. According to the Financial Times, A worker earning 20,000 a year would see net pay rise from 1,200 to 1,350 per month, while the cost to the employer would drop from 2,200 to about 1,650. Additionally, the new law limits the courts influence in 2employment matters, particularly in firings, as well as spells out a clearly limited severance package to be given to fired employees. The goal of the
legislation is both to stimulate after-tax income as well as to strengthen Mario Montis 2012 labor market reforms that made it much easier for firms to
fire employees for economic reasons.
This pro-business and pro-economic bill is expected to be finalized into law before the end of the year, yet Italy has already been written off by most of the global investment community. We were
Politi, James: Renzis Labour Reforms Clear Hurdle in Italys Parliament1
Politi, James and Segreti, Giulia: Italy Has Atomic Bomb to Revive Economy, says Renzi Aide2
GreenWood Investors LLC www.gwinvestors.com 2
looking forward to follow-up meetings with a few companies during the annual November Italian Market day in New York, but instead ended up receiving messages such as, Unfortunately I had to cancel my trip to NY. As of today interest in Italian media by the US investor is not really exiting.
Its funny, that in every conversation we have with US-focused investors, each one laments the fact that its been incredibly hard to find high-conviction ideas that arent crowded shorts. Even the former energy bulls dont even want to buy oil & gas stocks, except a few steely-eyed GreenWood Investors! Over the last year, weve been troubled by a similar conclusion on US markets, which is most concisely conveyed by the markets Cyclically-Adjusted PE (CAPE) Ratio. The CAPE ratio takes the average of the last 10 years earnings to smooth out the cyclical effects. In the US, it has only been higher in the tech bubble of the 1990s and in the late roaring twenties, just prior to the market collapse which kicked off the Great Depression with a thunderous roar.
Exhibit 1: Global CAPE Ratios
We suggest investors turn their attention to less competitive markets, perhaps to ones that are being completely ignored because of a behavioral bias similar to that of the US markets in late 2009 and 2010: the availability heuristic. There hasnt been a hopeful headline about Italy or its economy since the World Cup of 2006. The CAPE ratio of Italys MIB Index still sits at 9x, making it one of the cheapest markets in the world. As exhibit 1 shows, Italys market is in the Whos Who, of global markets, with great company in Greece, Russia, Hungary and Portugal. Yet, contrary to its new peers, Italys economy is diverse and dynamic. Every region in the northern half is equal to or more competitive than Western Germany and the Netherlands (see exhibit 2). Given the stock market indexs constituents are generally global companies headquartered in the north, southern Italy basically only exists for great resorts and transfer payments - it doesnt even play a role in much of anything anyone could invest in anyway. Before offending half of my family with ties to the south, I must say, they can grow a great tomato!
While Italys CAPE is among the cheapest in the world, the markets price to sales ratio is bested only by Hungary. Thanks to the depression the economy has weathered since 2012, the Indexs operating profit margins have declined to 6.6% from 15.2% in 2006. Investing in Italy is near the opposite of investing in the US market, with very cheap earnings and sales multiples, trough
GreenWood Investors LLC www.gwinvestors.com 3