Steel manufacturer Tenaris S.A. (TS) produces and sells seamless and welded steel tubular products; and provides related services for the oil and gas industry and other industrial applications. It is based in Luxembourg.
Earlier this month, the company announced its agreement to acquire 100% of the shares of U.S. seamless steel pipe producer Benteler Steel & Tube Manufacturing Corp, for an aggregate price of $460 million, on a cash-free, debt-free basis. The acquisition will include $52 million of working capital and is expected to close during the fourth quarter of 2022.
Benteler Steel & Tube Manufacturing Corp has an annual pipe rolling capacity of up to 400,000 metric tons and is expected to expand TS’ production range and manufacturing capacity in the country.
Although TS shares have declined over the past month, they are still up 16.3% over the past year and 16.4% year-to-date to close the last trading session at $24.28. Moreover, Wall Street analysts see an 83.7% upside potential in the stock. Each of the five Wall Street analysts rated the stock has rated it Buy.
Furthermore, TS resolved a previously disclosed investigation by the U.S. Securities and Exchange Commission about allegations of improper payments to a manager of the Brazilian state-owned energy company Petróleo Brasileiro S.A. Also, the U.S. Department of Justice has informed TS that it has closed its inquiry into this matter. These developments should act as catalysts, boosting the share price.
Here’s what could shape TS’ performance in the near term:
Impressive Financials
For the fiscal first quarter ended March 31, 2022, TS’ net sales increased 100.3% year-over-year to $2.37 billion. Its operating income grew 838.6% from the year-ago value to $484.25 million. Net income and earnings per ADS came in at $503.43 million and $0.85, indicating a year-over-year increase of 399.6% and 372.2%, respectively.
Working capital increased by $609 million, with higher receivables reflecting an increase in sales and higher inventories which were affected by higher costs for raw materials and energy.
Sound Profit Margins
TS’ EBIT margin of 15.26% is 40.5% higher than the industry average of 10.86%, while its net income margin of 19.42% is 299.5% higher than the industry average of 4.86%.
Also, its ROE, ROA, and ROTC of 12.58%, 9.80%, and 5.79%, compare with the industry averages of 10.61%, 3.54%, and 5.07%, respectively.
Furthermore, the company reported a surge in core profit in the fiscal first quarter, driven by higher prices for oil country tubular goods (OCTG) in the Americas and higher line pipe shipments in Europe and South America.
Favorable Growth Prospects
Analysts expect the company’s revenues to increase 74.7% year-over-year to $2.67 billion in the fiscal second quarter ended June 2022. Also, its revenues are expected to grow 63% in the quarter ending September 2022 and 59.2% in the fiscal year ending December 2022.
The consensus EPS estimate of $3.34 for the ongoing year indicates a 75.7% year-over-year growth. Moreover, its EPS is expected to rise 85.8% in the about-to-be-reported quarter ended June 2022 and 54.9% in the current quarter.
In addition, the company anticipated further growth in sales for the second quarter, with higher volumes in the Middle East and South America and stable margins with higher prices, compensating for the increase in costs and free cash flow to be positive. The company expects continued growth in sales in the second half of the year and margins to remain around the same level as the first half.
POWR Ratings Show Promise
TS has an overall B rating, translating to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a grade of B for Quality. Its higher-than-industry profit margins justify this grade.
TS also has a B grade for Sentiment, consistent with favorable analysts’ expectations around the stock.
Of the 32 stocks in the A-rated Steel industry, TS is ranked #14.
Beyond what I have stated above, one can also view TS’ grades for Value, Stability, Momentum, and Growth here.
View the top-rated stocks in the Steel industry here.
Bottom Line
TS’ acquisition of Benteler Steel & Tube Manufacturing Corp is expected to benefit the company across many verticals. And the company’s stable financial positioning should help it achieve its goal of expanding its manufacturing capabilities, which should boost its revenue stream in the long run. So, I believe investors have all the reasons to be excited about this acquisition.
How Does Tenaris S.A. (TS) Stack Up Against its Peers?
TS has an overall POWR Rating of B. However, one could also check out these other stocks within the Steel industry with an A (Strong Buy) rating: voestalpine AG (VLPNY), Acerinox, S.A. (ANIOY), and Usinas Siderurgicas de Minas Gerais S.A. (USNZY).
TS shares rose $0.32 (+1.32%) in premarket trading Friday. Year-to-date, TS has gained 18.45%, versus a -19.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.
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