Tenaris is Friday's IBD Stock Of The Day as the leading producer of steel pipe for the oil and gas industry trades right at an early buy point. Steel stocks have had a wild week amid Nippon Steel's $14.9 billion deal for U.S. Steel and a constructive demand outlook helped by growing faith in a soft landing for the U.S. economy.
Luxembourg Connection
Tenaris is the No. 2-rated stock in the Steel-Producers group, according to IBD Stock Checkup, based on a range of fundamental and technical factors. Interestingly, Tenaris also has a significant stake in the No. 1-rated steel stock: Ternium. Both are based in Luxembourg, and Ternium also is a supplier to Tenaris.
Tenaris held an 11.5% stake in Ternium's "share capital" as of Dec. 31, 2022, according to an SEC filing. That stake in the $8.5 billion steelmaker is up close to 25% in the past two weeks.
Tenaris Profit Margins
But Tenaris has a lot more going for it. Tenaris gets an A rating from IBD for its SMR performance, short for Sales Growth, Profit Margins and Return on Equity ratio.
Tenaris enjoys standout profit margins for the sector. In the third quarter, Tenaris reported $1 billion in earnings before interest, taxes, depreciation and amortization, or EBITDA. Coming on $3.2 billion in sales, that puts its EBITDA margin at a healthy 31%.
A discussion on the Q3 earnings call highlighted the high-margin story for Tenaris. An analyst noted that a competitor put its own EBITDA at $500 per metric ton. But Tenaris guidance of 25% to 30% EBITDA margins for Q4 suggested it earned over $800 per ton in EBITDA.
'Rig Direct' Model
Tenaris CEO Paolo Rocca highlighted the company's strong position in the U.S. market. He noted that its "Rig Direct" model, delivering straight to oil rigs on a just-in-time basis, creates more value than a distribution model.
Rocca added, the concentration of oil producers in international markets "favors (pipe) producers like Tenaris that have an established global footprint."
Q3 was a soft quarter for Tenaris, with revenue down 21% sequentially, though up 9% from the year-ago period. The drop from Q2 reflected both price declines and lower shipments. Trends were looking better in the fourth quarter, when the company held its earnings call on Nov. 2. But Tenaris said that there was an "ongoing adjustment in price levels" in the Americas, partly due to imports.
Offshore drilling continues to be a strength. Tenaris said full-year revenue from offshore projects will be up 50% this year, led by activity in Guyana and Brazil.
TS Stock
Tenaris announced a stock buyback authorization of $1.2 billion, or about 6% of shares, on Nov. 1.
TS stock fell 0.1% to 35.25 in Friday stock market action. Intraday, shares reached 35.57, above a 35.31 early entry.
The official buy point is 35.98 from a seven-week flat base, according to a MarketSmith analysis. The latest consolidation can really be seen as a handle on the end of a long cup-with-handle base.
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