Commodity Volatility Will Test Subsea Efforts But Backlog Will Stabilize

Key Takeaways

• Volatile commodity prices and tariffs could significantly compress margins, affecting profitability and constraining future earnings growth.
  
• Delays in geopolitical or economic areas may impact revenue and profitability from long-term projects.
  
• High-quality inbound orders and strategic alliances position TechnipFMC for growth, with a substantial backlog ensuring earnings predictability and stability amidst minor financial impacts.

Catalysts

Engages in the energy projects, technologies, systems, and services businesses in Europe, Central Asia, North America, Latin America, the Asia Pacific, Africa, the Middle East, and internationally.

• The potential for a shift of capital budgets from onshore to offshore might be overly optimistic, especially with commodity prices introducing volatility. If this transition doesn't materialize as expected, it could negatively impact subsea project revenue growth.
  
• The company's focus on long-term projects in regions like Mozambique and Cyprus might face delays or reduced activity due to unforeseen geopolitical or economic events, impacting revenue and profitability from these initiatives.
  
• Despite the significant subsea backlog, any miscalculation in timing or execution could lead to project deferrals, impeding revenue recognition and affecting overall earnings predictability.
  
• Over-reliance on direct awards, while beneficial, could expose TechnipFMC to risks if client confidence wanes, possibly due to broader industry challenges, affecting future order intake and revenue visibility.
  
• Continued discussions around commodity prices and tariffs suggest a volatile environment that, if sustained or worsened, could compress margins significantly, thereby impacting profitability and constraining future earnings growth.

TechnipFMC Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on TechnipFMC compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming TechnipFMC's revenue will grow by 3.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.2% today to 8.8% in 3 years time.
• The bearish analysts expect earnings to reach $904.0 million (and earnings per share of $2.3) by about May 2028, up from $854.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, down from 14.3x today. This future PE is greater than the current PE for the GB Energy Services industry at 10.6x.
• Analysts expect the number of shares outstanding to decline by 2.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

TechnipFMC Future Earnings Per Share Growth

Risks

• TechnipFMC has demonstrated strong financial performance, with revenue reaching $2.2 billion and adjusted EBITDA increasing by 38% compared to the prior year, which could bolster earnings.
  
• The company has a substantial backlog totaling nearly $16 billion, providing a stable revenue stream that extends through the end of the decade, offering earnings predictability.
  
• The company's high-quality inbound orders have exceeded revenue in 8 of the last 9 quarters, supported by strategic projects from major clients like Equinor and Shell, which may drive revenue growth.
  
• TechnipFMC's strategic alliances, such as with Cairn Oil & Gas, enhance its prospects for growth in new markets, potentially impacting future revenue and net margins positively.
  
• The company's limited exposure to regions impacted by volatile commodity prices and recently announced tariffs, with only minor anticipated financial impacts, ensures stability in adjusted EBITDA.

Valuation

• The assumed bearish price target for TechnipFMC is $25.53, which represents two standard deviations below the consensus price target of $34.83. This valuation is based on what can be assumed as the expectations of TechnipFMC's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $24.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $10.3 billion, earnings will come to $904.0 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of $29.13, the bearish analyst price target of $25.53 is 14.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.