SZSpecialSituations Winner 61ab2e5e7047

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SZSpecialSituations Winner 61ab2e5e7047


<ul><li><p>https://www.sumzero.com</p></li><li><p>GreenWood Investors LLC 1</p><p>One Page Summary</p><p>Share Price 7.62 LTMEV </p><p>Multiple</p><p>x Shares 578.1 Sales 15.93 56.8%</p><p>= Market Cap 4.4 EBITDA 1.54 5.88x</p><p>+ Net Debt (Average) 4.6 EBIT 0.91 9.95x</p><p>= Enterprise Value (EV) 9.0 Backlog 36.91 24.5%</p><p>Valuation Considerations All figures in billions, except per share amounts</p><p>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. </p><p>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 </p><p>decline.. Buy Europe, initiatives &amp; rebounding budgets will create slightly favorable environment. </p><p>6. Cheaper than cheap European peers 7. Sum-of-the-Parts nearly a triple before margin expansion and cost cutting</p><p>Tuesday, December 16, 2014</p><p>Quintessential Special Situations: New Management: Turn-around-focused CEO with phenomenal track record</p><p> Non-Core Asset Sales: Over 50% of current stock price in net realizable value</p><p> Cash Returns: Restructuring to raise margins, de-leverage and reinstate dividend</p><p> Confusion: Incorrect Financial Information on Bloomberg, Factset and CapitaliIQ, plus weak </p><p>businesses masking best-in-class subsidiaries</p><p> Restructuring Plans: Upcoming investor day to discuss new CEOs plans</p><p>(FNC IM): Volare</p><p>Sum of the Parts (LTM)</p><p>Helicopters 11.83 P. 9</p><p>Defense 9.52 P. 12</p><p>Aerospace 5.39 P. 13</p><p>Non-Core Sales 4.02 P. 15</p><p>Corporate -1.50</p><p>=21.23</p><p>per share</p><p>Watch the 5m Pitch!</p><p>http://www.gwinvestors.com</p></li><li><p> Macro &amp; Market Considerations: Fish in a Barrel </p><p>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. </p><p>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 </p><p>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 </p><p>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 </p><p>fire employees for economic reasons. </p><p>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 </p><p> Politi, James: Renzis Labour Reforms Clear Hurdle in Italys Parliament1</p><p> Politi, James and Segreti, Giulia: Italy Has Atomic Bomb to Revive Economy, says Renzi Aide2</p><p>GreenWood Investors LLC 2</p><p>Full Report</p><p></p></li><li><p>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. </p><p>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 &amp; 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. </p><p>Exhibit 1: Global CAPE Ratios </p><p>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! </p><p>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 </p><p>GreenWood Investors LLC 3</p><p>0.0</p><p>5.0</p><p>10.0</p><p>15.0</p><p>20.0</p><p>25.0</p><p>30.0</p><p>35.0</p><p>Gre</p><p>ece</p><p>Rus</p><p>sia</p><p>Hun</p><p>gary</p><p>P</p><p>ortu</p><p>gal</p><p>Aus</p><p>tria</p><p>Italy</p><p>B</p><p>razi</p><p>lIre</p><p>land</p><p>P</p><p>olan</p><p>dC</p><p>zech</p><p>N</p><p>orw</p><p>ay</p><p>Spa</p><p>in</p><p>Turk</p><p>ey</p><p>Uni</p><p>ted </p><p>Kin</p><p>gdom</p><p>K</p><p>orea</p><p> (Sou</p><p>th)</p><p>Sin</p><p>gapo</p><p>re</p><p>Fran</p><p>ce</p><p>New</p><p> Zea</p><p>land</p><p>Fi</p><p>nlan</p><p>dB</p><p>elgi</p><p>um</p><p>Isra</p><p>el</p><p>Aus</p><p>tralia</p><p>N</p><p>ethe</p><p>rland</p><p>sG</p><p>erm</p><p>any</p><p>Chi</p><p>na</p><p>Thai</p><p>land</p><p>H</p><p>ong </p><p>Kon</p><p>gC</p><p>anad</p><p>aM</p><p>alay</p><p>sia</p><p>Taiw</p><p>an</p><p>Sw</p><p>eden</p><p>S</p><p>outh</p><p> Afri</p><p>ca</p><p>Indi</p><p>aM</p><p>exic</p><p>oS</p><p>witz</p><p>erla</p><p>nd</p><p>Japa</p><p>nIn</p><p>done</p><p>sia</p><p>Uni</p><p>ted </p><p>Sta</p><p>tes</p><p>Den</p><p>mar</p><p>k</p><p>Source: Star Capital</p><p></p></li><li><p>margins and peak unemployment, but at least improving consumer confidence. Also contrary to the US government over the past four years, its government also has a mandate to enact reforms and pass pro-economic legislation. On the other side of the pond, were just slapping high fives because our congress averted another government shut-down. </p><p>Exhibit 2: GDP Per Capita by European Region </p><p>Source: Eurostat </p><p>Exhibit 3: FTSE MIBs Price / Sales Ratio </p><p>Data Source: Bloomberg </p><p>GreenWood Investors LLC 4</p><p>0.00x</p><p>0.20x</p><p>0.40x</p><p>0.60x</p><p>0.80x</p><p>1.00x</p><p>1.20x</p><p>1.40x</p><p>1.60x</p><p>4/28/06 4/28/07 4/28/08 4/28/09 4/28/10 4/28/11 4/28/12 4/28/13 4/28/14</p><p></p></li><li><p>If you can buy companies that are trading at cheap levels relative to current operations given the employment rate and all of the discussed factors hampering Italys economy, what happens when the economy actually starts to recover? Margin expansion, de-leveraging and higher equity multiples. The modern triumvirate of outsized stock returns. </p><p>Having identified a fully stocked barrel of fish, which ones do you decide to shoot? Our Fiat thesis has been playing out quite well, and while it still has considerable room to run (our fair value is currently north of 20 and will rise to north of 30 in the next two years), and it remains our biggest position. But theres another Italian job that reminds us of Fiat in nearly every way. </p><p>Overview of the Multi-Faceted Special Situation </p><p>Finmeccanica is a state-suggested rollup that has become a modern Rube Goldberg managed in the past without a serious concern to shareholders or capital allocation. Historical capital allocation has been magnificently terrible, which is part of the reason why the trifecta of Capital IQ, Factset and Bloomberg all calculate the companys financial situation dramatically different than reality (see Exhibit 29 on page 28). Finmeccanica is similar to Fiat in seven major ways: </p><p>1. Excellent CEO with a history of turn-arounds, particularly with heavy government involvement 2. High-quality business units being 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, </p><p>initiatives, rebounding budgets will create slightly favorable environment. 6. Cheaper than the cheapest European peers 7. Sum-of-the-Parts gets you nearly a triple before segment margin expansion and cost cutting </p><p>The idea represents a special situation in nearly every sense of the word: its literally a turn-around CEO focused on unwinding 66 years of government-influenced investments and is instead implementing a Jack Welch strategy of focusing on the company's strengths. Many of the divisions that have been flagged as non-core are money-losing and have near-term catalysts, as the sales process has been quite active recently. His stated goals of improving profitability, ROIC, leverage, and cash returns to shareholders will reward investors if he achieves them. While Finmeccanica is cheaper than its European and US peers, the discount alone doesnt justify buying the stock. A favorable investment will rely upon a very capable CEO to restructure weaker parts of the business, and to end the companys history of capital mis-allocation and repetitive write-downs. Given the Italian government owns 30% of the company, and the ministry of defense is a large and important customer, restructuring such an entity with entrenched interests everywhere requires an incredibly shrewd manager. Thanks to a bribery scandal involving the Indian government (Italians and Indians accepting or receiving bribes? Oh, the chances!), management heads have rolled and Finmeccanica has found itself with perhaps its most capable CEO it has had in a very long while. </p><p>1. Excellent CEO </p><p>It's hard to imagine a more Byzantine and sclerotic culture than the Italian government bureaucracy. If lean and efficient corporate America has a true opposite in this world, perhaps the culture can be found somewhere along the banks of Fiume Tevere. In September 2006, when the Italian economy was nearing its peak, the passenger rail system was heavily leveraged with </p><p>GreenWood Investors LLC 5</p><p>http://www.gwinvestors.com</p></li><li><p>negative EBITDA and was on the verge of bankruptcy or a state rescue. An insider named Mauro Moretti assumed the role of CEO in September of the year and embarked on an ambitious turnaround plan in the face of negative rail traffic in his first full year on the job. Despite the headwinds both traffic and the Italian economy would create, Moretti managed to de-leverag...</p></li></ul>