Tenaris SA (TS): Neutral on Sales, Buy on Earnings

Tenaris SA (TS) shares are outperforming the market today. The extra oomph comes via an upgrade from Goldman Sachs. Analyst, Henry Tarr lifted his recommendation to "Neutral" from "Sell."

Taking TS out of the penalty-box has the metal fabricator in the green by 1.53% as we type.

Based in Luxembourg with 26,825 employees, Tenaris is engaged in the steel pipe manufacturing and distribution activities. The company produces and sells seamless and welded steel tubular products, as well as provides related services for the oil and gas industry primarily oil country tubular goods used in drilling operations, and for other industrial applications.

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It's sort of funny that Tarr would move off a rare "sell" recommendation with TS approaching its 52-week high of $49.87. This call at the end of March would have been spectacular, but it is easy to look backwards and criticize. The whole 20/20 vision thingy.

Looking forward, Tarr tells interested investors, "We remove Tenaris from the Sell List and upgrade to Neutral as we now take a more positive view on the outlook and growth prospects relative to the rest of our coverage."

The analyst carried on, "We continue to believe that consensus earnings expectations for FY2014 are too high, driven by lower volumes in Brazil and the Middle East combined with a lack of ongoing pricing power in the US. However, on a medium term view, we see interesting opportunities opening up in shales in Mexico and Argentina, strong volume growth in the US with a potential near-term catalyst around the final outcome of the trade case, and the potential for a return to gas drilling."

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Although Tarr thinks earnings estimates for 2014 are "too high," two of the nine analysts covering the pipeline maker raised their outlooks in the last 30 days with one in the last week.  In fact, EPS estimates for the year are on the rise as started the quarter at $2.76 and now stands at $2.79.

Optimism is building for 2015 as well. Three analysts upped their bottom line views for next year within the last 30 days and the estimate has gone from $3.08 to $3.14 in the last 30 days.  Research shows that rising earnings estimates tends to predict a rising stock price.

Let's see where TS might be headed based on the company's recent price-to-sales (P/S) and price-to-earnings (P/E) history using 2015 earnings and sales estimates.

As we mentioned two paragraphs back, Wall Street forecasts earnings of $3.14 (and rising) for next year. During the last half-decade, investors paid an average of 18.3 times EPS for Tenaris. Do the math, and a potential price-target of $57.46 emerges – 20% upside not including 2.6% annual dividend.

Moving up the income statement, analysts put the revenue consensus of '15 at $11.52 billion, projected year-over-year growth of 9.2% - attractive.

Since 2009, the typical P/S ratio for TS was 2.58. Once again, do the math with excel and $50.35 is where the Industrial Goods company would trade using next year's sales consensus – 5.16% upside without the dividend.

Overall: On a P/S basis, Tenaris SA (TS) is probably a market performer (Neutral) using 2015's revenue consensus. However, earnings estimates with the five-year average P/E plus the dividend could push TS into the outperform category.