Investments In Advanced Steel Technologies Will Boost Deepwater Opportunities

Key Takeaways

• Tenaris is enhancing North America revenue through service differentiation and strategic product development for deepwater projects.
  
• Efficiency and decarbonization investments are expected to reduce costs and improve margins, with infrastructure projects driving demand growth.
  
• Declining sales, safety risks, regional financial issues, tariff uncertainties, and market instabilities pose significant challenges to Tenaris' revenue and financial performance.

Catalysts

Manufactures and distributes steel pipes for the energy industry and other industrial applications in North America, South America, Europe, the Middle East and Africa, and the Asia Pacific.

• Tenaris has strengthened its position in North America by enhancing its service differentiation, especially with major shale operators, which is expected to improve revenue through increased operational efficiency and reliability.
  
• The company's focus on developing new products and technology, such as its ultra-high collapse steel grades and 3D mapping technology, positions it well for growth in deepwater projects, likely boosting revenue.
  
• Investments in industrial efficiency and decarbonization, including new electric arc furnaces and renewable energy initiatives, are expected to improve net margins by reducing production costs and environmental impact.
  
• The completion of infrastructure projects in Vaca Muerta, alongside ramped-up drilling activity, is anticipated to drive revenue growth through increased demand for Tenaris’s products and services.
  
• Potential U.S. tariffs creating higher price environments could establish more favorable pricing for Tenaris's domestic operations, leading to higher earnings in North America.

Tenaris Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tenaris's revenue will decrease by 0.0% annually over the next 3 years.
• Analysts are assuming Tenaris's profit margins will remain the same at 16.3% over the next 3 years.
• Analysts expect earnings to remain at the same level they are now, that being $2.0 billion (with an earnings per share of $1.85). However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.4 billion in earnings, and the most bearish expecting $1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the US Energy Services industry at 8.5x.
• Analysts expect the number of shares outstanding to decline by 6.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

Tenaris Future Earnings Per Share Growth

Risks

• The decline in sales by 17% year-over-year and 2% sequentially, driven by lower volumes and selling prices, raises concerns about sustained revenue generation.
  
• The accident at the company's Argentina plant, resulting in fatalities, highlights safety risks and potential liabilities that could affect earnings through legal and operational disruptions.
  
• The financial difficulties and reduction in drilling activity by Pemex in Mexico pose risks to Tenaris' revenue from the region, as the company had to reduce credit exposure, impacting overall revenue potential.
  
• The uncertainty surrounding U.S. tariffs and quotas (Section 232) presents a risk related to cost increases for imported steel, which may pressure net margins if not counterbalanced by higher selling prices.
  
• Political and economic instability in key markets like Argentina and Mexico could negatively impact future demand for Tenaris’ products, thereby affecting revenue streams and overall financial performance.

Valuation

• The analysts have a consensus price target of €17.981 for Tenaris based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €21.63, and the most bearish reporting a price target of just €13.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.5 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of €14.62, the analyst price target of €17.98 is 18.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.