New Offshore Projects In Brazil And Nigeria Will Improve Future Prospects Despite Revenue Challenges

Key Takeaways

• Modernization and tech integration are boosting Tenaris’s productivity and likely enhancing margins and earnings.
  
• Secured contracts and favorable trade conditions could expand market share and positively impact future revenue growth.
  
• Declining sales, pricing pressures, and regulatory changes pose revenue and cash flow challenges, despite investment and optimism in the U.S. market.

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 completed a major cycle of investment in the modernization of its industrial system, including the incorporation of innovative technology and automation. This is expected to improve productivity and environmental performance, likely leading to enhanced net margins and earnings.
  
• The company has secured significant offshore project contracts, including those in Brazil and Nigeria, which will expand its order backlog for 2025 and 2026. This is expected to positively impact future revenue growth.
  
• Reduction in imports and favorable trade conditions in North America, due to reduced imports from countries like Thailand and quota reductions for Korean imports, could lead to increased market share and improved pricing strength for Tenaris, supporting improved revenue and margins in the region.
  
• Investments and increasing activities in regions like Vaca Muerta in Argentina, facilitated by improved economic conditions and international relationships, could boost future revenue streams as oil export capacity expands.
  
• Tenaris announced a $700 million share buyback program, which suggests potential increases in earnings per share and shareholder value, affecting future earnings outlook favorably.

Tenaris Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tenaris's revenue will decrease by -3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.2% today to 16.8% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $1.59) by about January 2028, down from $2.6 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, up from 7.9x today. This future PE is greater than the current PE for the US Energy Services industry at 15.8x.
• Analysts expect the number of shares outstanding to grow by 5.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Tenaris Future Earnings Per Share Growth

Risks

• Declining sales and average selling prices in key markets such as the USA, Mexico, and Saudi Arabia, as well as weaker line pipe shipments to Argentina, signal potential revenue challenges.
  
• The upcoming destocking process by Aramco and the payment delays from Pemex could disrupt cash flow and affect revenue generation in these regions.
  
• Despite ongoing investments in the U.S. and positive outlooks for North America, the softening of oil drilling activity in the Middle East presents a risk to maintaining steady demand and profitability.
  
• Future earnings might be pressured if the anticipated increase in the U.S. drilling activity does not occur as expected, potentially impacting the revenue accrued from higher-priced products and services.
  
• Regulatory changes following political shifts in Mexico and the U.S. could create uncertainties, impacting trade relations and market access, potentially affecting revenue and net margins.

Valuation

• The analysts have a consensus price target of €22.43 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 €47.96, and the most bearish reporting a price target of just €14.89.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.9 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of €18.6, the analyst's price target of €22.43 is 17.1% 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.