TechnipFMC (FTI) Surges 118% in a Year: Is it Sustainable?
Energy services company TechnipFMC FTI is up nearly 118% over the past year, comprehensively outperforming the broader Oil/Energy sector and the benchmark S&P 500. The energy space has inched up 0.6% during this period, while the S&P 500 has gained a modest 16.5%.
Let’s dive into the reasons for FTI’s outperformance and analyze whether the stock can keep the momentum going.
What Led to This Price Increase?
By all accounts, the manufacturer and supplier of products, services and fully integrated technology solutions for the energy industry appears to be positioned for healthy growth in the next few years. In particular, the company believes that its Subsea 2.0 platform — a new, technologically sophisticated suite of products that improves project economics by cutting down on the dimensions of the equipment installed underwater — would enjoy fast-track adoption. The next-generation, environment-friendly all-electric system should boost opportunities.
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On Apr 27, TechnipFMC reported first-quarter 2023 results, wherein the company maintained a strong backlog of projects, which was $10.6 billion as of Mar 31. In addition to revenue visibility, this backlog supports the company's future performance.
Notably, FTI brought in an impressive $2.5 billion in quarterly subsea inbound orders representing a book-to-bill of 1.8. This means that FTI brought in much more work than it completed. The company kept its full-year guidance intact and has secured significant projects over the past few months to boost revenue generation in the short-to-medium term.
Finally, TechnipFMC is looking to convert 40-50% of its adjusted EBITDA into free cash flow by 2025. This will be facilitated by debt reduction, allowing the leading manufacturer and supplier of integrated technology solutions for the energy industry to lower its annual interest expense.
The company’s capital budget, on the other hand, is expected to be restricted between 3.5% and 4.5% of revenues. TechnipFMC has reduced its long-term debt from about $1.73 billion on Dec 31, 2021 to less than $1 billion in the most recent quarter, with a cash balance of $1.1 billion.
Is the Rally Overdone?
While the overall macro environment remains constructive, investments in offshore programs remain limited. This tepidness in activity hurts the overall demand for services and equipment across the industry spectrum and does not bode well for TechnipFMC — a firm that helps develop and produce offshore energy fields.
Further, despite the relative stability in oil prices, for most upstream operators, the focus is still on sustaining the lower spending levels, further trimming breakeven costs and maintaining financial health. As a matter of fact, after bouncing strongly from the depths of the pandemic, the oil and natural gas rig count in the United States has been gradually declining since the beginning of 2023. This indicates a drop in future drilling services. This is expected to hurt the likes of TechnipFMC.
Worringly, the company’s shares look pricey regarding valuation, with the current 33.49X forward earnings multiple sitting well above the 18.47X five-year median and Zacks sector average.
Last but not least, FTI doesn't pay a dividend and, as such, might not appeal to income investors.
In conclusion, TechnipFMC’s share gains look to be overdone from a fundamental point of view. Therefore, it would be prudent to wait for a better entry point as the timing is still not right for investors to hit the Buy button. FTI currently carries a Zacks Rank #3 (Hold).
3 Energy Stocks to Buy
Investors interested in the energy space might look at operators like Profire Energy PFIE, Eni S.p.A. E and Smart Sand SND, each carrying a Zacks Rank #2 (Buy) currently.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Profire Energy: The 2023 Zacks Consensus Estimate for Profire Energy indicates 125% year-over-year earnings per share growth. PFIE has a trailing four-quarter earnings surprise of 11.1%, on average.
Profire Energy is valued at around $60.6 million. PFIE has seen its shares fall 4.6% in a year.
Eni: It is valued at some $50.8 billion. The Zacks Consensus Estimate for E’s 2023 earnings has been revised 17% upward over the past 60 days.
Eni, headquartered in Rome, Italy, beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other. E shares have gained 14% in a year.
Smart Sand: SND beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other. Smart Sand has a trailing four-quarter earnings surprise of 183.3%, on average.
SND is valued at around $69.8 million. Smart Sand has seen its shares drop 26.2% in a year.
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