Morningstar | TEN Updated Forecasts and Estimates from 23 Jan 2019
Tenaris had a solid third quarter, with revenue up 6% sequentially and adjusted operating margin improving to 13.6% from 12.4%. Tubes segment volumes were up just 2%, but the company benefited from a robust increase in operating income per ton to $273 from $236 previously, driven by higher pricing in the U.S. oil country tubular goods market. Our fair value estimate and no-moat rating remain unchanged for now.Higher U.S. OCTG market pricing has been the result of the tariffs and quotas applied by the U.S. on steel products. Total U.S. imports of OCTG fell 50% in the third quarter versus the first half of 2018 average. Still, third-quarter import levels (about 2.2 million metric tons annualized) actually came in slightly above our long-term expectations of around 1.6 million tons. This suggests that we have no need to amend our skepticism that continued trade restrictions will sustain large U.S. market pricing improvement.
We note that a more restrictive trade regime hasn't been all positive for Tenaris, as the company has in the past benefited from highly profitable U.S. OCTG sales imported from its Mexico and Argentina plants. Furthermore, any volumes routed away from the U.S. only exacerbate international OCTG overcapacity, and international markets still account for about half of Tenaris' sales.
The market has slowly come to appreciate this mixed picture, in our view, likely accounting for a good deal of the 25% fall in Tenaris' share price in the last six months. Tenaris' share price has now nearly converged to our fair value estimate of $27 per share.
Tenaris manufactures and supplies seamless steel pipe products for the global oil and gas industry, as well as other industrial applications. Co. operates an integrated worldwide network of steel pipe manufacturing, research, finishing, and service facilities with industrial operations in the Americas, Europe, Asia, and Africa. Co. produces pipes for boilers, heat exchangers, hydraulic cylinders, automotive, structural and other industrial applications and supplies welded steel pipes for oil and gas pipelines in the South American region. Its principal products include casing, tubing, line pipe, and mechanical and structural pipes. Co.'s organizes its business around one segment: Tubes.
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