New Government in Italy: How Will It Affect These Italian ADRs?

What's the outlook for Natuzzi, STMicroelectronics, and Gentium?

Mar 4, 2014 at 2:36PM

As you probably heard, after the breakup of the government coalition that was ruling Italy, Matteo Renzi became the new prime minister in the country. Well, he just took office on Saturday and designated Pier Carlo Padoan, chief economist at the Organization for Economic Cooperation and Development, or OECD, as Italy's finance minister.

Padoan will become Italy's fourth consecutive finance minister who comes from outside politics, and his task will be to get the country out of stagnation. Let's not forget that for the past three years, the finance ministers in Italy were mainly occupied with cutting expenses and protecting the country's bonds from speculation. Padoan, instead, might start trying to figure out how to make the country grow again. Many things could improve if he decides to start spending more, attract investments, and push demand.

Let's see what may lie ahead for three Italian ADRs in this context.

First, let's take a look at Italy's largest furniture-maker, Natuzzi (NYSE:NTZ). Best known for its brand Divani & Divani, the company designs and manufactures a broad collection of residential upholstered furniture.

This company has not been doing well for a long time. In the first nine months of 2013, it lost $52.9 million, and net sales dropped 4% to $448.3 million compared to the same period a year ago. In fact, the company has not made a profit in six years, which is raising concerns.

Natuzzi claims that the main reason for the company's situation is the high cost of making many of its products at home. The central part of its production, along with half of its 6,500 worldwide employees, is in Italy, where high labor costs and strict employment laws reduce the company's competitiveness. Making a product in the country costs Natuzzi up to 10 times more than in its factory in China. The company has factories in China, Romania, and Brazil, but pressure from Italian unions keeps it from manufacturing more outside home.

You also need to know that restrictions in the Italian labor market are notorious, and when the recent economic downturn hit Natuzzi's key consumer markets of the U.S. and Europe, the company could not adjust its cost base to compensate for the fall in demand. This situation persists today, and if sales do not pick up, the stock price will continue to go down.

However, Natuzzi recently announced a turnaround plan, which includes halving its expensive Italian workforce, opening more stores in developing markets, and increasing marketing expenditure. Regarding local costs, the company signed an agreement in early October with the Italian unions to address the restructuring of its Italian operations, proceed gradual layoffs of redundant workers, close an industrial plant located in Ginosa, and streamline activities within the remaining Italian plants. Let's hope this works and the company returns to profitability.

Looking for margins
Second, here's the Italian broad-based analog chipmaker and the largest chipmaker in Europe, STMicroelectronics (NYSE:STM).

For the full year 2013, net revenue for STMicroelectronics totaled $8.1 billion, down 4.8% compared to 2012, while gross margin dropped half a percent to 32.3%. The main contributors to these weak results were its microcontrollers and automotive products.

The company's results are not terrible, but they show some of the difficulties this chipmaker is facing. First, it has high European exposure, which means weak demand and high salaries. Second, margins in this industry (and many others) are key. STMicroelectronics' margins have averaged about 35% in the last few years while those of higher-volume peers reached 60%. Texas Instruments, for example, boasts corporate gross margins of more than 50%.

Still, STMicroelectronics has some fundamental strengths. The Italian company remains among the leaders in analog technologies, it has one of the broadest product portfolios in the industry, and it holds a strong position in the automotive market. In this category, the outlook for sales is positive, as demand for safer, greener, smarter cars is pushing government regulations that increase electronic content per vehicle.

As you see, the political transition in the country will not make significant changes in the company's future, which is driven by international factors.

Successful tender offer
Finally, here's Gentium (UNKNOWN:GENTY.DL), the Italian biopharmaceutical company that researches and develops drugs derived from DNA and DNA molecules.

Something interesting about this company is that Jazz Pharmaceuticals (NASDAQ:JAZZ) recently made two subsequent tender offers to acquire shares of Gentium at $57 a share. Well, in the first offer, about 79% of outstanding Gentium common shares and American depositary shares were tendered; after the subsequent offer, this percentage went up to 98%.

Now Jazz Pharmaceuticals has become the indirect majority shareholder of Gentium. This is good news, as the businesses are highly synergistic. Gentium's product Defitelio (defibrotide), a treatment for severe hepatic veno-occlusive disease is complementary to Jazz Pharmaceuticals' experience in orphan diseases in the area of hematology and oncology. In addition, this drug was granted marketing authorization by the European Commission in October last year.

As you might have guessed, due to the circumstances, the new political scenario in Italy does not make an impact on Gentium.

Final thoughts
The new government is facing a stagnant economy where there's room for action but not much cash. We'll have to wait and see whether this government decides to start new policies and builds enough political support to execute them. For now, it is hard to foresee major changes in the course of the Italian economy for 2014.

Natuzzi needs to improve its sales levels, and whether this comeback plan will work or not it is hard to predict. But hey -- profitability will improve a bit at least.

Gentium's new era with Jazz Pharmaceuticals is encouraging. The company will increase its penetration, especially in the European market.

As for STMicrolectronics, its price and problems are more correlated to the highly competitive global markets than to Italy. However, a better policy toward research and development would help the company gain some profitability.

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