Fincantieri: land war puts warship makers in the dock

A rising tide lifts all ships, they say. But higher military spending is no help to shipbuilders in the middle of a land war. This explains the apparent anomaly of Fincantieri, which reported improving orders last week. The Italian company makes naval vessels as well as cruise ships. Its shares are flat despite a jump of about a third for most European defence stocks over a year.

Call it pragmatism, or dismiss it as recency bias. But the Ukraine war has underlined the primacy of land-based systems, such as Rheinmetall tanks, in a European conflict. Ukraine’s sinking of Russia’s Black Sea flagship has, meanwhile, emphasised the vulnerability of expensive warships to sophisticated missiles.

Navies are only expected to receive a trickle from the current wave of defence spending.

Even so, Fincantieri’s European multipurpose frigate has a good chance of winning further orders. The joint venture teams Fincantieri with French rival Naval Group. The ships already operate in both countries’ navies. Fincantieri is hoping to build more as Italy muscles up in the Mediterranean Sea. The US has chosen the vessel for its new series of Constellation class guided-missile frigates.

Additional orders for corvettes and submarines mean naval revenues should increase to two-fifths of total by 2027, up from nearly a third last year. But equipping ships with warfare systems and arms produces better returns, points out Sash Tusa of researcher Agency Partners. Hulls account at most for about half the value of a ship.

Fincantieri has, meanwhile, been taking write-offs for its big cruise ship business. The group’s net debts are high, forecast to hit seven times ebitda by the end of this year. The shares trade at half the 20 times forward earnings multiple of the European defence sector.

Investors are often accused of piling indiscriminately into any stocks connected to a hot trend. European armaments stocks currently tell a different story. Combating and containing Russian expansionism calls for investment in projectiles and land artillery to fire them, not fancy ships and aircraft.