Subsea Innovations And Global Expansions Forecast Robust Revenue And Earnings Growth

Key Takeaways

• Subsea orders and operational efficiencies signal strong future revenue and improved profitability through innovation and geographic expansion.
  
• Financial discipline and a strong company backlog highlight improved financial health and potential for increased investor confidence.
  
• Heavy reliance on specific geographic markets and innovative technologies like Subsea 2.0 poses risks to future revenues and competitive positioning if unexpected challenges arise.

Catalysts

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

• Subsea orders growing robustly with a high book-to-bill ratio indicates a strong incoming revenue stream which can significantly impact future revenues.
  
• Improvement in Subsea adjusted EBITDA margins and guidance raised for Subsea EBITDA margins imply operational efficiencies and innovation leading to better profitability and potentially higher net margins.
  
• Expansion in Guyana and the securing of significant projects like ExxonMobil's Whiptail project, leveraging Subsea 2.0 systems, indicate geographic expansion and product innovation that can drive revenue growth and improve margins due to differentiated and higher-margin offerings.
  
• The announcement of achieving a record level of total company backlog and well-positioned for Subsea orders approaching $10 billion for the year indicates strong future revenue potential and underpins confidence in sustained earnings growth.
  
• Strong financial discipline reflected in shareholder distributions and net debt reduction, alongside operational performance leading to an investment-grade rating from Fitch, suggests improved financial health and operational efficiency, potentially increasing investor confidence and contributing to a reevaluation of the stock's undervaluation.

Assumptions

• Analysts are assuming TechnipFMC's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.3% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $2.58) by about August 2027, up from $453.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $878 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2027 earnings, down from 24.6x today. This future PE is lower than the current PE for the GB Energy Services industry at 17.9x.
• Analysts expect the number of shares outstanding to decline by 2.21% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.18%, as per the Simply Wall St company report.

Risks

• The reliance on specific geographic locations and markets, such as Guyana and Mozambique, for significant portions of future project and revenue expectations could present risks if unexpected geopolitical or economic issues arise in these regions, potentially affecting future revenues and growth.
  
• The business model and financial performance are heavily dependent on continuous innovation and maintaining a technological edge, such as Subsea 2.0. Any failure to keep up with technological advancements or delays in development could impact competitive positioning and affect profit margins.
  
• The strategy of securing long-term commitments and direct awards from clients to ensure quality capacity highlights a potential risk of client concentration. Should any major clients decide to shift their strategies or reduce their spending, this could significantly impact projected revenues and backlog growth.
  
• The anticipation of new projects and expansion into emerging basins beyond 2025 involves considerable forecasting and market prediction risks. Should these new frontier opportunities not materialize as expected or face delays, there could be substantial impacts on long-term revenue and earnings growth projections.
  
• The operational and financial benefits derived from the iEPCI and Subsea 2.0 initiatives, which rely on innovation and efficient execution, could be at risk if competitors catch up technologically or if there are significant operational issues in delivering these complex projects, potentially affecting net margins and earnings.

Valuation

• The analysts have a consensus price target of $30.48 for TechnipFMC 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 $37.0, and the most bearish reporting a price target of just $8.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.3 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $26.0, the analyst's price target of $30.48 is 14.7% higher.
  
• 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.