Selling Tanks in Europe Just Got Tougher for General Dynamics

Despite official denials at the time, RUSSIA sent "hundreds" of T-72 main battle tanks across the Ukrainian border last year. Image source:WWW.KREMLIN.RU.

With Russia now officially admitting that it has troops in Ukraine,you might think that right now would be an awfully good time to be in the tank-selling business.

And in fact, it is. Finland, Estonia, and Latvia are all buying armored personnel carriers (some used, cast off from more modern militaries) to ward off the Russian bear. Poland is buying honest-to-goodness main battle tanks. (And yet, while they buy many weapons here in the U.S., the Poles aren't doing their tank-shopping here -- but in neighboring Germany.)

Meanwhile, things just got tougher for General Dynamics' defense business -- and don't say you weren't warned.

Misery loves companiesLast year, we described how weak economies, tight defense budgets, and a proclivity for relying on the U.S. as "world policeman" combined to make things tough for Europe's two main armored vehicle-makers. With sales hard to come by, Germany's Krauss-Maffei Wegmann, or KMW, and Nexter Systems of Francedid what comes naturally to companies with too-small markets and too much competition:

They decided to merge.

With more than 6,000 workers between them, annual sales of $2.7 billion, and $8.8 billion in backlogged orders, it wasn't an easy merger. But as of last week, KMW and Nexter have finally completed their combination. Today, the maker of both Germany's Leopard 2 main battle tank and France's Leclerc are one and the same company.

Giat's Leopard 2 main battle tank -- a favorite in Germany and... Poland? Image source: Poul-Werner Damvia Wikimedia Commons.

Rise of a rivalBut what does this new rival look like, and how does it compare to America's own General Dynamics?

According to website Defense-Update.com, KMW and Nexter have gathered under the umbrella of holding company Giat Industries S.A. (which predated them both). Going forward, Giat will be based in Amsterdam, and will be owned 50-50 by the former owners of KMW and Nexter. Co-CEOs Frank Haun of KMW and Stphane Mayer from Nexter will run Giat.

Because Giat is privately held, it's going to be hard to get reliable data on the company's financials going forward. For example, over on S&P Capital IQ -- an excellent resource for financial data on public companies -- Giat is currently pegged at just $47 million in annual revenue. That's soon going to not be the case at all. So let's take a quick snapshot of where Giat is today -- because this may be our best chance to get a clear view of General Dynamics' new rival.

According to Defense-Update, Giat currently boasts annual revenues of $2.2 billion, with "an order book of around 9 billion euro" -- $9.8 billion. These are curious numbers, implying that over the past 15 months, Giat has added $1 billion to its backlog but shrunk its annual revenues nearly 19%.

The Euro's precipitous plunge vis-a-vis the U.S. dollar explains much of this drop, however. From merger announcement in July 2014 to merger completion in December 2015, the euro lost 20% of its value relative to the dollar. That accounts for almost all of the revenue shrinkage, and suggests that the weapons business is actually holding up pretty well in Europe. Giat's surging backlog number likewise suggests that business has been brisk.

Euro to US Dollar Exchange Rate data by YCharts.

Show me the moneyProfits-wise, Capital IQ last clocked KMW at earning about a 9.5% net profit margin on roughly $900 million in revenues. Nexter Systems, meanwhile, was believed to be earning $99 million in operating profit on $720 million in revenues -- a robust 13.8% margin. Combined, our best guess is that the two companies are therefore earning about 11.4% operating profits before accounting for any synergies from cost-cutting.

Is that something General Dynamics can compete with? Actually, yes. And in fact, it already is.

Just last month, General Dynamics successfully negotiated a sale of 84 M1126 Stryker Infantry Carriers to Lithuania. Meanwhile, the General boasts a robust 15% operating profit margin in Combat Systems (where they build the tanks) on annual revenues of $5.7 billion -- about 160% more than Giat sells in a year.

Call me an optimist, but I think General Dynamics is going to compete with these guys just fine.

General Dynamics' M1 Abrams main battle tank -- rushing forth to meet the competition. Image source: General Dynamics.

The article Selling Tanks in Europe Just Got Tougher for General Dynamics originally appeared on Fool.com.

Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 308 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.