Morningstar | New Morningstar Analyst Report for Leonardo-Finmeccanica
Leonardo, previously named Finmeccanica, largely completed its portfolio restructuring with the disposal of its energy business in 2013, followed by the sale of its transportation assets in 2015. With EUR 1.8 billion of proceeds and increasing profitability, management deleveraged from a staggering 7.7 times net debt/EBITDA at the end of 2013 to a more manageable 2.3 times at the end of 2017. The firm is a leading supplier of defence systems in Europe, and we believe it will benefit from the improved outlook for European defence spending.After high order intake in 2016, up 61% year on year, because of the contract to supply 28 Eurofighter Typhoon aircraft to Kuwait, top-line growth will accelerate in 2018 and beyond. Leonardo provides a significant amount of the content on the Eurofighter Typhoon (close to 36% of the equipment value). Additionally, operational leverage, rationalisation of the company’s industrial footprint and overhead functions, and cost controls initiated by the new management team will lead to profitability improvements, in our view. Although we like Leonardo’s radical transformation from a sprawling conglomerate into an industrial company with a special focus on aerospace, defence, and security, we do have strategic and operational concerns. First, the firm competes with larger and increasingly aggressive U.S. defence companies in the global fighter aircraft market and on other international defence deals. Second, the company’s helicopter business, which accounted for 28% of revenue and 22% of profits in 2017, faces stiff demand headwinds due to sluggish economic growth and production issues of the A169 helicopter, combined with a downturn in oil and gas exploration. Overall, we expect nice margin expansion and improvement in returns to invested capital over the next several years, but our concerns about the helicopter market, coupled with our no-moat rating, temper our enthusiasm for the stock.Leonardo is the holding company for The Finmeccanica Group, and is responsible for guiding and controlling industrial and strategic operations, coordinates its subsidiaries. The Finmeccanica Group operates in the Aerospace and Defence sector, which includes the Helicopters, Defence and Security Electronics, Aeronautics, Space and Defence Systems segments; and in the Transportation sector, which also includes Fata S.p.a., in addition to the companies operating in the transportation sector.
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