A very interesting spin, an update on some LEAPS and a new position
Iveco (IVG Italy)
Exciting times ahead for Iveco.
Iveco is mostly known as a designer and producer of vans and trucks. Its core operations are boring, commoditized, capital intensive and exposed to cycles. In short, not the most interesting company.
But Iveco has also a relatively small (for its size) Defence segment, focused on a wide range of vehicles (armored, protected, amphibious, customizable).
This unit has long been in the company, and discussions regarding a potential separation have regularly come up given the relatively small size and volatile growth. It was also often considered annoying, as just the presence of such as segment was a no-go for many European investors given the strong push to ESG / sustainable portfolios (whatever that means) over the past years.
Of course this all changed with the Russia – Ukraine war. Suddenly Europe is not considering defence as toxic anymore. There’s no more a discussion about whether or not to invest in defence – it’s now all about ‘how much’. There are even plenty of examples of European Defence stocks being included in ESG / sustainable portfolios (ah the hypocrisy).
What makes me look today is that Iveco has now decided to proceed with the separation of the business via a spin-off.
The news of the spin is a positive surprise, as there was talk about divesting the segment to e.g. Leonardo for €500m–1.0bn. Iveco will continue to explore incoming offers for the segment (it has clearly stated there’s good interest in the business) but I assume a spin will be the most valuable option for the company.
Indeed, while the IVG shares had a good run since the first announcement (roughly +45%), I think there could be much more to go.
One the one hand we have a rapidly growing and profitable business. Revenues grew +31% yoy in Q1 25 and ebit +64% (~13% margin). There’s some lumpiness, but overall the business is firing on all cylinders (pun intended), the order book is full and the outlook is solid.
And then there’s the valuation of the sector. Listed European Defence companies are trading at anywhere between 10x ev/ebitda to 30x, the higher being more ‘smart’ weaponry.
Why couldn’t this business fetch 15x ev/ebit? That would be € 2.2bn EV on Q1 annualised, almost half of Iveco’s current EV (including factoring and some provisions).
And why not even more in the current climate?
I could easily see it go much higher as a separate entity with the markets pricing in a > decade of growth. The shift towards Defence spending that Europe is witnessing is simply mindboggling. The industry went from a pariah to ‘must invest’ in an incredibly short amount of time. This won’t stop after the Ukraine war. Europe is ready to invest, and it will be off a very low base.
Just look at the heat turning up:
Tecnicas Reunidas (TRE Spain)
Every now and then there’s a company that continues to perform strongly, with the shares remaining very attractive even though they moved up quite a bit.
Some time ago I wrote about Tecnicas Reunidas:
So far the Tecnicas Reunidas thesis is progressing well, and the share price is tracking along nicely.
When I first wrote about Tecnicas Reunidas, nobody cared. Now very few care, but the market cap is back over €1bn - for the first time in almost 5 years.
We're seeing steady growth and improved quality of the order book, revenues and operating margins.
This remains one of my investments with the most torque (playing this with long-dated calls).
Fast forward a few months, and Tecnicas is up ~60% ytd with the company reporting strong growth in the order backlog, revenues and earnings.
Just the most recent quarter:
revenue reached €1.3b, +30% yoy and +6% from the previous quarter. The natural gas segment was a standout performer, with revenues jumping over 60% to roughly €1.0bn.
ebit for the quarter was €56m, +40% yoy.
Tecnicas Reunidas' backlog reached a record high of €14.9bn, +41% yoy. Their pipeline remains strong at over €66bn, with ~€15bn earmarked for decarbonization projects.
they ended the first quarter with a net cash position of €423m, up strongly vs last year.
The last one is very good to see and will be a major driver of growth. One of the reasons why stocks in this industry tends to see massive corrections, it not only because of the cyclical nature of the business but also due to the sizable and lumpy nature of projects. Delays and cancellations can cause massive working capital swings. You need a strong balance sheet to protect yourself. So when the net cash position improves, it tends to have an exacerbated positive impact on the valuation (and the other way around).
As for the future, Tecnicas Reunidas maintained its 2025 guidance of revenues exceeding €5.2bn and an ebit margin around 4.5%. The outlook for 2026 is for more; over €5.5bn revenues and an >5% ebit margin. Plus, they're planning on bringing back dividend payments in 2026. I would image that to be another boost to the shares.
With the 2025 and 2026 targets well in view, its time to take the 2028 targets seriously – 8% ebit margins.
That’ll be ~€450-500m, and roughly €250-300m net income.
During the last cycle (2006-2014) the company achieved max ~€150m net income. In the peak years, the company was trading at roughly 15x p/e on average.
At 15x on the 2026 guidance (which is well within reach) this would be another +70% from today’s share price.
However, the 2028 guidance implies >30% income growth p.a. over the few years after 2026. Why can't the multiple be higher in a few years?
20x on 2026e net income of let's say €275m would be +130% vs today.
And this is all assuming earnings stabilize thereafter. A reminder, I’m counting on the super cycle here, meaning we could see strong growth and cash generation for a decade.
I’ve told you before why this stock has been so beaten up:
there's not much love given poor management decisions in the past.
we're still shell shocked from the recent horrible downcycle.
EPC firms (like TR) constantly face cost overruns, delays, disputes with clients, as well as geopolitical and regulatory risks.
add to that the highly competitive landscape, with numerous global and regional players vying for contracts.
But the story is starting to change. The share price moves are getting stronger. The LEAPS are printing.
There will be a ton of volatility ahead, but so far so good. Let's continue to hope they doesn't mess it up.