2023-08-28 16:51:08 ET
Summary
- Revenue, net income, and free cash flow (LTM) are at record highs since 2014. Meanwhile, P/S, P/E, and EV/EBITDA are close to record lows.
- Operating and net margins (LTM) are at record highs since 2014. Insiders own ~60% of shares, indicating “skin in the game”.
- Management expects strong growth in Saudi demand for line pipe in the next few years. The firm recently received a 46,000-ton contract for seamless pipe in Brazil.
- Despite risks including economic/political instability and adverse weather events, Tenaris’ impressive growth, low multiples, and high insider ownership present an interesting opportunity.
About
Tenaris S.A. ( TS ) makes and sells tubular products such as line pipes and steel casings for industrial applications. Most of its customers fall into the oil and gas industry, but the firm also provides products related to alternative energy technologies such as geothermal wells and bio-energy power plants. As its FY-2022 20-F explains:
Our customers include most of the world's leading oil & gas companies, and we operate an integrated network of steel pipe manufacturing, research, finishing and service facilities with industrial operations in the Americas, Europe, the Middle East, Asia and Africa… Our seamless pipes production and processing facilities are located in North and South America, Europe and Asia. Our welded pipes production facilities are located in North and South America and in Saudi Arabia.
In Q2-2023, Tenaris' net sales amounted to $4b and the firm had ~3 million tons of steel shipments, per the latest earnings release .
Strong Financials & Attractive Multiples
Revenue, operating income, and net income ((LTM)) are all at record highs since 2014, according to data from Stockrow .
The firm's operating and net margins ((LTM)) are both at record highs since 2014, and its free cash flow margin ((LTM)) is in the upper end of its historical range.
Tenaris' net debt (quarterly) is negative and has been dropping for five consecutive quarters. Its debt/assets ratio remains quite low, now sitting at ~3.6%, and the number of common shares has been stable since at least 2020.
The firm's P/S, P/E, and EV/EBITDA (quarterly) ratios are all close to the bottom of their historical ranges.
Finally, about 60% of shares are owned by insiders, per Finviz and Stockrow , indicating that company insiders have substantial "skin in the game" and are incentivized to make decisions that benefit shareholders.
Potential Catalysts
Tenaris' U.S. sales of wage 400 series connections recently hit a new record, per the earnings transcript ; those products are mostly used by operators that engage in shale well drilling. Overall pricing has improved, with the recent quarter delivering a 21% YoY rise in the average selling prices within its Tubes operating segment. Sales are growing at an impressive clip and are up 46% YoY, now standing at ~€4.1b. If these trends continue, the firm may be more likely to see future growth and deliver upside surprises.
Management expects strong growth in Saudi demand for line pipe and open country tubular goods ((OCTG)) in the next few years, partially driven by Saudi Aramco's pursuit of its Master Gas System. In the firm's view, OCTG stocks are relatively depressed and will need to be rapidly replenished.
The government of Argentina recently commenced stage 1 of a pipeline that was constructed with Tenaris' pipes, and management believes there are more pipeline infrastructure development projects on the horizon. Just a few days ago, the Argentine government said it will launch a project that aims to transport gas from the Vaca Muerta shale reservoir.
Tenaris is seeing some momentum in its Brazilian operations. They recently received a 46,000-ton contract for seamless pipe that will go to an offshore pipeline and were awarded a supply of 95,000 tons which will be used for the firm's BMC33 deepwater development.
The firm increased its indirect shareholding in Global Pipe Company, which makes large-diameter pipes and conductor casings, bringing ownership from 35% to 57%.
Finally, management believes U.S. oil and gas drilling activity will likely rebound before the end of the year.
Risks
Management said its outlook for operations in Colombia has worsened, noting that the firm's number of operating rigs in the region has fallen from 50 (in 2022) to 28. Tenaris believes this is a bottom, but it expects it to persist for at least the next two quarters, per the recent earnings transcript.
Tenaris' operations may suffer during adverse weather events, which are becoming increasingly common as climate change intensifies. Weather pattern changes in the past few years have made natural disasters more common and harder to predict. The firm's production facility in Veracruz, Mexico is particularly exposed to earthquakes, and its facility in Texas is in a region with an elevated risk of hurricanes and floods. Severe freezes have in the past (Texas, 2021) resulted in production losses and cost overruns, according to the firm's 20-F. Any future unfavorable weather could impair the firm's financial results.
The firm depends on drilling activity, which is driven by current and future oil prices. A prolonged and/or severe drop in the price of oil (or its future outlook) could lead to reduced drilling activity and reduced demand for Tenaris' pipes.
Since Tenaris has substantial operations in international markets such as Brazil, Argentina, China, and Colombia, it is especially exposed to the risk of elevated economic and political instability. This increases the odds that the firm encounters unfavorable and unexpected regulatory changes that could hurt its growth and/or margins.
Steel manufacturing typically involves a substantial amount of fixed costs. If a sudden change in product demand takes place, then Tenaris' ability to cut costs is limited, and it has a greater chance of seeing its margins drop compared to firms with more flexible cost structures.
Public health emergencies can cause sudden demand drops; the sudden oil price drop in 2020 resulting from the COVID-19 pandemic forced the firm to take more drastic measures to contain costs, such as facility closures and temporary pauses in operations. If the COVID-19 pandemic or a new health threat intensifies sufficiently, this could happen again.
Execution
Buying a stock is a bet on where its price goes, not necessarily the fundamentals of the business. Since there is statistical evidence of trends in equity markets, investors who apply a scientific mindset may benefit from focusing on companies with uptrending share prices.
Tenaris' stock hit a local bottom on May 31, 2023, and has rallied ~30% since, per Finviz . On July 11, the stock broke above its 200-day moving average, a popular trend indicator.
Zooming out, the stock is still 32% below its local peak from back in 2014.
It may be sensible to consider a bet on this stock only while the uptrend remains in play, perhaps by requiring that a simple trend signal is active; for example, requiring that the price be above its moving average (50, 100, 200-day, whichever has stronger evidence).
Bottom Line
Tenaris' revenue and FCF growth, margin expansion, depressed multiples, and high insider ownership make it an interesting opportunity for investors. While its price continues to trend, the stock could be a reasonable bet for investors with a momentum-inspired strategy to consider.
For further details see:
Tenaris S.A.: Record Profits, Low Multiples, Expanding Margins, And Insider Ownership