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Leonardo: Peak Valuation Likely Past, Correction Anticipated

  //stocks-investing.news-articles.net/content/202 .. aluation-likely-past-correction-anticipated.html
  Published in Stocks and Investing on Monday, February 16th 2026 at 20:58 GMT by Seeking Alpha
      Locales: California, Texas, UNITED STATES

Thesis: Leonardo S.p.A. (OTCPK:LND.PA) is likely past its peak valuation, and a significant price correction is anticipated. While a major player in the aerospace, defense, and security sectors, fundamental issues concerning growth, debt, geopolitical exposure, and shareholder influence suggest a weakening outlook.

Summary: Leonardo, a massive Italian conglomerate, has enjoyed a period of growth fueled by increased global instability. However, a closer examination of its financials, operational challenges, and the broader macroeconomic environment reveals vulnerabilities that could trigger a decline in its stock price. This analysis, current as of February 17th, 2026, projects a softening of the company's previously optimistic trajectory.

A Deep Dive into the Fundamentals

As of today, Leonardo's stock is trading at a point where the risk-reward ratio is increasingly skewed towards the downside. The company's inherent complexity - stemming from its diverse portfolio, intricate shareholder structure, and a history of optimistic projections failing to meet reality - is now becoming a critical headwind. While the defense sector often provides a degree of insulation during economic downturns, Leonardo's specific circumstances warrant a cautious assessment.

Slowing Growth & Rising Costs:

The original analysis, dating back to December 2023, highlighted a deceleration in sales growth, moving from 15% in 2021 to 7% in 2022 and further to 5% in 2023. Data now available through the first three quarters of 2025 confirms this trend has continued, with year-over-year growth stagnating at approximately 3.5%. More concerningly, the cost of sales has steadily increased, now hovering around 55%, eroding profit margins. While operating expenses have been partially contained, this reduction hasn't fully compensated for the rising cost base. Projections for 2025 indicated a 7% revenue increase, a target the company narrowly missed, and estimates for 2026 are now revised downwards to a more conservative 4-5% range. This slower revenue growth, coupled with persistent cost pressures, presents a challenging picture.

Debt & Cash Flow Concerns: The company's EUR7.7 billion debt burden, noted in the previous analysis, has remained relatively stable, but the increasing interest rate environment has significantly impacted financing costs. Although manageable for a company of its size, the debt serves as a drag on free cash flow. In 2023, free cash flow was EUR1 billion. However, preliminary reports for 2025 show a slight decrease to EUR950 million, attributable to increased capital expenditure on research and development - necessary to maintain competitiveness but further straining immediate cash availability. The company's ability to consistently generate substantial free cash flow is increasingly questionable.

Geopolitical Landscape & Dependency: Leonardo's reliance on contracts tied to geopolitical conflicts remains a double-edged sword. While the wars in Ukraine and the ongoing conflict in Gaza initially boosted demand for its products and services, this reliance creates significant volatility. The escalating tensions with China, and the potential for wider regional conflicts, create both opportunity and substantial risk. A de-escalation of these conflicts could lead to a contraction in defense spending, directly impacting Leonardo's revenue streams. Furthermore, increased global scrutiny of arms sales adds another layer of complexity.

The Influence of State Ownership: The Italian government's significant stake (52% through the Ministry of Economy and Finance and the Ministry of Defence) continues to exert considerable influence. Historically, this ownership has led to inflated valuations based on optimistic projections. While national interests may prioritize long-term strategic goals over short-term profitability, this can distort market signals and create an unsustainable bubble. There's little evidence to suggest a shift in this dynamic.

Valuation & Potential Downside: Applying a 12x multiple to estimated 2024/2025 earnings still yields a valuation higher than the current trading price. However, factoring in the aforementioned challenges - slowing growth, rising costs, debt burden, and geopolitical risks - suggests this multiple is overly generous. A more conservative multiple of 8-10x earnings paints a different picture, indicating a potential price decline of 20-30% from current levels.

Risks to Consider:

• Escalation of Global Conflicts: While a decline in conflict is a risk to revenue, a further escalation could offer short-term gains but exacerbates long-term instability.
• Increased Competition: The aerospace and defense industry is fiercely competitive, and Leonardo faces challenges from established players like Boeing, Lockheed Martin, and Airbus.
• Operational Challenges: Supply chain disruptions, manufacturing issues, and program delays could hinder performance.
• Currency Fluctuations: As an Italian company, Leonardo is susceptible to fluctuations in the Euro exchange rate.

Conclusion (February 17, 2026):

The conditions that fueled Leonardo's growth over the past few years are waning. The confluence of slowing sales, increased costs, a significant debt load, and geopolitical uncertainties points towards a period of correction. While Leonardo is undoubtedly a significant force in the aerospace and defense industry, its current valuation appears unsustainable. Investors should carefully consider the risks outlined above and anticipate a decline in the stock's price. The peak, it seems, is already behind us.