Finmeccanica Will Struggle to Regain Lost Altitude

On paper, Finmeccanica shares look absurdly cheap. The Italian engineering and defense giant’s stock has fallen 30% since last week’s disappointing second-quarter results and it now trades at barely five times estimated 2012 earnings, less than half the sector average. The group’s market capitalization of €3 billion ($4.3 billion) is also less than half the book value of its assets.

But investors shouldn’t bet on a quick recovery.

Finmeccanica’s troubles run deep. Its reluctance to sell assets in good times means the 30% state-owned group remains more of an industrial conglomerate than other European defense groups like BAE Systems and EADS. Its activities currently range from making buses and trains to power plants and AgustaWestland helicopters. It has long been dogged by loss-making long-term contracts at train-maker AnsaldoBreda.

Now defense cutbacks are putting the core business at risk. The U.S. budget-deficit deal threatens anticipated growth in the U.S and may trigger future writedowns; Finmeccanica grabbed a foothold in the U.S with its 2008 $5.2-billion purchase of DRS Technologies. Spending is being cut in the U.K. where Finmeccanica is among the biggest suppliers to the Ministry of Defense. Italy is also likely to cut spending. Meanwhile, the civil war in Libya, the former Italian colony, has jeopardized civilian transport orders.

True, the two main problem divisions, aeronautics and rolling stock, account for only one fifth of Finmeccanica’s €19 billion annual revenues. New Chief Executive Officer Giuseppe Orsi has pledged to shed noncore businesses— Bombardier has expressed