Tenaris SA (TS) is a leader in the manufacture and distribution of tubular products used in oil and gas drilling and transportation (know as Oil Country Tubular Goods, or OCTG).
With the Covid-19 crisis and the oil price war, drilling activity has been crushed in North America, and so has Tenaris' stock price. It may be some time before drilling resumes.
Tenaris attracted my attention because it has more cash on its balance sheet than debt, which is rare for an oil & gas industry supply company. The stock has also fallen below 15-year lows. The balance sheet is in excellent shape, with Altman Z-Score of 3.8 and a Gurufocus Financial Strength score of 8 of 10.
On April 24, it was trading below its tangible book value, which it has never before done since its IPO in the U.S.
Given its capital intensive nature, Ibelieve it is an ideal stock to be evaluated using the median price-book ratio approach. As you can see in the chart below, the stock is trading at less than a third of its normalized price-book-justified price, indicating a big margin of safety. Past history indicates that the stock price eventually could catch up to its median price-book ratio, though it could be a long wait.
Similarly, the median price-sales ratio (see chart below) is a useful indicator. The price-sales ratio has plunged to 1, indicating that investors are anticipating a huge slowdown.
In terms of dividends, Tenaris has paid out steady dividends for about 15 years now. However, given the economic circumstances, I think it is very likely to expect that the dividend will be cut.
The oil price war and economic shutdowns have briefly turned oil into a valueless commodity in the United States these last few weeks. Brent crude, the global benchmark, has lost 70 percent of its value in the last year, which brings us to the new narrative: we could be in for a long era of low prices, all the more so since electric cars and renewable energy are finally taking off.
However, in my opinion, the expectation that oil prices will never recover is likely wrong. In my experience, the only thing that works with oil and oil-related stocks is being a contrarian. While there are no guarantees of the future, history has shown that in this market contrarians win in the most often.
Tenaris, like all oil goods and services stocks, is deeply cyclical. The time to buy cyclical stocks is when the economy is down so that you can sell when business is good. These are not "buy and hold" stocks. We do not know how long the slump will last, but I think Tenaris's strong balance sheet and global footprint put the odds in its favor.
One way I find useful in valuing cyclical stocks in to use normalized earnings over at least an entire business cycle. This prevents one from becoming overly over-optimistic or pessimistic. Looking at Tenaris's earnings per share, its certainly oscillated up and down the trendline. Using the trendline as a guide, I am estimating normalized earnings to be $1.55 per share.
Plugging this number into the Gurufocus DCF Calculator gives me the following:
I used a discount rate of 3% because the company is debt-free and the low rate of long term government bonds.
Disclosure: The author does not have a position but is considering a long position.
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