- Tenaris pays out a solid dividend with a safe payout ratio, consistently rewarding shareholders with a secure dividend amid cyclical upswings.
- Recent earnings exemplify Tenaris' ability to outperform expectations and the business' plan to increase CapEX expenditures.
- The company has been able to perform in line with the S&P 500 when adjusting for dividends.
- Strategic improvements within Tenaris' core business have allowed for margin expansion and future growth.
- Based on the assumptions of my DCF figures, Tenaris is currently undervalued, resulting in a strong buy rating.
Tenaris S.A. (NYSE:TS) has been able to successfully capitalize on cyclical highs and is in a position for strong future growth. I believe Tenaris is a strong buy due to its solid dividend, its strategic improvements within its core business to create operational efficiencies, and the company's undervaluation when assuming my DCF figures.
Tenaris S.A., along with its subsidiary companies, specializes in the production and distribution of "seamless and welded steel tubular products and related services". These products are primarily utilized in the oil and gas industry, as well as other industrial applications.
The range of products offered by Tenaris includes "steel casings, tubing products, mechanical and structural pipes, line pipes, cold-drawn pipes, premium joints and couplings, and coiled tubing products". These products are essential for various operations in the oil and gas sector, such as drilling, workovers, and subsea pipelines.
In addition to its focus on the oil and gas industry, Tenaris also manufactures sucker rods that play a crucial role in oil extraction activities. Furthermore, the company produces tubes used in plumbing and construction applications.
Tenaris goes beyond manufacturing and distributing steel tubular products. It provides oilfield and hydraulic fracturing services, catering to the specific needs of the energy industry. Additionally, Tenaris is involved in energy and raw material supply, as well as offering financial services.
The company operates on a global scale, with a presence in North America, South America, Europe, the Middle East and Africa, and the Asia Pacific region. Tenaris S.A. is committed to delivering high-quality steel tubular products and comprehensive services to meet the diverse needs of its customers across the globe.
With a market capitalization of $15.73 billion, Tenaris has experienced a 52-week high of $38 and a low of $22.24. Presently trading at $26.45, the stock's price is slightly below its 200-day moving average of $30.57. Tenaris stands out in terms of valuation, with a price-to-earnings ratio of 4.95, positioning the company at a significantly lower value compared to its industry peers.
Tenaris also delivers a strong return to its shareholders through a reliable dividend yield of 2.53%, supported by a conservative payout ratio of 18.94%. This prudent approach ensures that Tenaris retains sufficient free cash flow to invest in growth initiatives and fortify its financial standing, while simultaneously providing investors with consistent income streams.
In the first quarter of 2023, Tenaris surpassed expectations with impressive results on both the bottom line and top line. Earnings per share exceeded forecasts by $0.28, reaching $1.91, while revenues outperformed by $270 million, totaling $4.14 billion. This remarkable performance reflects a significant year-over-year growth of 74.7%.
These results highlight Tenaris' ability to capitalize on favorable market conditions and take advantage of the current cyclical highs in oil prices. Furthermore, the company's strong financial performance positions it to generate substantial free cash flows, which will safeguard and enhance its core business, even as cyclical highs subside.
A clear indication of Tenaris' commitment to optimizing its operations is reflected in its capital expenditures. In the first quarter of 2023, the company allocated $117 million toward capital expenditures, surpassing the figures from both the previous quarter ($108 million) and the first quarter of 2022 ($67 million). This increased investment in operational enhancements and efficiency measures will enable Tenaris to optimize its business performance and establish a more resilient and adaptable business model, better prepared to navigate future cyclical downturns.
Tenaris Compared to the Broader Market
Over the course of the last three years, Tenaris has consistently performed on par with the S&P 500 when accounting for dividends. This serves as a testament to Tenaris' adeptness in efficiently allocating its free cash flow, enabling the company to demonstrate resilience during downturns like the one experienced in 2020, while also capitalizing on growth opportunities during cyclical highs, such as the present situation.
Strategic Improvements Leading to Operational Efficiencies
Tenaris has proven over time that it is dedicated to improving its fundamental business model and creating operational savings, which has resulted in margin expansion.
The launch of Tenaris S.A.'s extensive quality control program, Rig Direct, is a noteworthy illustration of the company's commitment to operational excellence. This program intends to optimize the delivery of steel pipe products to drilling rig locations and streamline the supply chain.
Tenaris works closely with its clients to comprehend their unique requirements and optimize the entire supply chain process through the Rig Direct program. This calls for coordinating steel pipe manufacture, inspection, transportation, and final delivery to the drilling rig site.
Both Tenaris and its clients have saved a lot of time and money by using Rig Direct. The initiative has increased overall operating efficiency, reduced the risk of product damage or delays, and eliminated pointless intermediaries and handling and shipping operations.
I believe that incorporating initiatives like Rig Direct enables Tenaris to expand its margins and generate additional free cash flows, which can be utilized for future growth or to reward shareholders through increased dividends. By improving efficiencies, Tenaris also enhances its resilience during cyclical downturns by minimizing losses and maintaining a stable balance sheet.
With Tenaris continuously investing in capital expenditures to enhance its operations and expand its business, it is likely that we will witness further improvements, particularly during cyclical highs where ample free cash flow is available.
Tenaris garners a "buy" rating from analysts, who hold an overwhelmingly positive outlook on the stock. With an average one-year price target of $40.79, the stock exhibits a potential upside of 54.92%.
Prior to formulating my assumptions and conducting the discounted cash flow analysis, it is essential to determine the Cost of Equity and Weighted Average Cost of Capital for Tenaris using the Capital Asset Pricing Model. By incorporating a risk-free rate of 3.67%, I have derived the Cost of Equity to be 8.25%, as illustrated below.
Based on the aforementioned Cost of Equity, I proceeded to calculate the Weighted Average Cost of Capital for Tenaris. Using this approach, I arrived at a WACC value of 8.18%, as depicted below. It is important to note that this figure is lower than the industry average of 9.11%.
Through a 5Y Equity Model DCF analysis utilizing net income, it has been determined that Tenaris is currently undervalued by approximately 32%, with a fair value estimate of around $19.38. This calculation was based on a discount rate of 10% over a 5-year time frame. In order to account for potential macroeconomic challenges and cyclical downturns, a 1.75% risk premium was incorporated into the assumptions. Additionally, it is anticipated that the company will continue to improve its operations using the available FCF generated during the recent cyclical highs, as indicated by modest margin enhancements in the latter part of the DCF analysis.
Regulatory and Political Risks: Tenaris faces political and regulatory risks as it conducts business in a number of nations, each with its own specific regulatory and political environment. Government policy changes, trade restrictions, sanctions, or political unrest in key markets could endanger business operations and financial results.
Industry Volatility: The cyclical nature of the oil and gas business is evident in its alternating upswings in demand and profitability and downturns. Tenaris' operating environment, order backlog, and financial performance could all be impacted by this inherent volatility.
Raw Material Costs: Steel is the main raw material on which Tenaris bases its product production. The company's profitability and capacity to satisfy client demand could be greatly impacted by the volatility and swings in steel prices and availability.
In conclusion, I am of the opinion that Tenaris represents a compelling investment opportunity. This belief is supported by factors such as the company's dividend payout, its commitment to operational efficiencies, and the perception of undervaluation based on the discounted cash flow analysis conducted.
This article was written by
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